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Silver Tsunami

Careful–the Silver Tsunami is Coming!

Approximately one in three homes in the U.S. is owned by someone who is 60 and older. As these millions of boomers decide it’s time to sell their homes and move to another location or to a retirement community, that will have an impact on housing markets, says the article from Market Watch “These housing markets will feel the biggest impact from the ‘Silver Tsunami.’”

In the ten years between 2007-2017, around 730,000 homes that had been owned by seniors went on the market every year. That number is expected to grow enormously over the next few decades. A news analysis from Zillow says that as many as 920,000 homes will go on the market between 2017-2027.  In the ten years after that, the figure may go as high as 1.17 million homes per year.

In total, says Zillow, almost a third of currently owner-occupied homes, around 20 million properties, will go on sale as the direct result of a boomers dying or deciding to move to a smaller home or retirement facility.

The wave won’t hit all at once, and it won’t strike all markets equally.

The biggest impact is expected to be in the Tampa-St. Petersburg-Clearwater metropolitan area in Florida. The Tucson, Arizona area is next in line, with the Miami-Ft. Lauderdale-Port Saint Lucie and Orlando metro areas following.

At the far end of the spectrum, Salt Lake City, Utah, is expected to see the smallest impact from the Silver Tsunami. Less than 20% of homes there are expected to go up for sale, because of being owned by aging boomers.

A few other cities are expected to escape this trend with little impact. They include Austin, Houston, and Dallas, all in Texas.

In other cities, there are micro-neighborhoods that will feel the impact within cities. For instance, in greater Phoenix, all will be well. However, in the towns of El Mirage or Sun City, nearly two-thirds of all homes will be on the market, as they are mainly retirement communities.

Those who are planning to relocate for retirement may want to keep the Silver Tsunami in mind, if their retirement finances depend upon the value of their homes.

Reference: Market Watch (December 3, 2019) “These housing markets will feel the biggest impact from the ‘Silver Tsunami’”

Suggested Key Terms: Silver Tsunami, Retirement Communities, Home Values, Boomers

If I Roll All My IRA Money to a Roth, Will I Forfeit Some Tax Benefits?

Rolling over all of your assets from a traditional IRA to a Roth IRA can mean tax-free income down the road. However, remember that you’ll also pay taxes on the amount moved. That means there will be no future opportunity to reduce your tax rate further.

CNBC’s recent article, “Moving all your IRA money to a Roth means losing some tax benefits,” says that those lost tax benefits generally relate to medical expenses, charitable contributions and business losses. In contrast, if you leave too much in the IRA, the result may not be good. You may have higher required minimum distributions and taxes.

Roth IRAs grow tax-free and withdrawals generally are also untaxed. They also have no lifetime required minimum distributions, or RMDs. However, traditional IRAs have some potential tax benefits that are gone for good, once the money is moved.

The primary concept in managing taxes in retirement is that you want to get as much money out of your accounts at the lowest possible cost. When you roll over money from a traditional IRA to a Roth, the amount moved is taxed as ordinary income. As a result, you should complete the rollover when you’re in as low a tax bracket as possible. This means tax-free income available down the road, but it also means you’ll have already paid taxes on the rollover. Thus, there’s no opportunity to reduce your rate further. However, if you leave too much in the IRA, the result may not be good. If you think that you might have these future expenses, then it might make sense to keep money in the traditional IRA.

Medical expenses. These are usually a major expense for older Americans and that’s not including the cost of long-term care. However, a tax break for medical expenses is one of the few remaining deductions available to individuals, since the new tax law in 2018. It’s limited to the amount that exceeds 10% of your adjusted gross income and you must itemize your deductions to take advantage of it. However, those with high medical bills can potentially reduce their taxes by applying it. To take the deduction, you must have taxable income to weigh it against. So, if much of your income is coming from a Roth IRA tax-free, you could be restricted in whether you can take advantage of the break. If you took money from an IRA (whose withdrawals are taxed as ordinary income) to cover those health costs, you could use the medical deduction against that withdrawal. This could result in paying less in taxes than what you had paid by rolling that money to a Roth.

Qualified charitable distributions. If you give money to charity each year, keeping money in your traditional IRA to make those donations could be wise, because contributions made through qualified charitable distributions—funds sent directly to the charity from a traditional IRA—are excluded from your taxable income. However, the tax break for charitable contributions can only be used if you itemize your deductions, and generally, a deduction isn’t as valuable as an income exclusion.

Note that this strategy is only available to IRA owners and beneficiaries who are age 70½ or older. Since that is the age when RMDs kick in, the move could reduce your tax liability on the RMD to zero. If your RMD is $5,000, but you give $5,000 to charity anyway, do the qualified charitable distribution, and you don’t have to pick up any of the income.

Business losses. These can only be claimed on your tax return, if you have income to claim them against.

General tax considerations. No matter your overall income, any amount that falls into each of seven defined brackets is taxed at a specific rate. Therefore, the more income you can get taxed at those lower rates, the better. If you could leave some money in the IRA to soak up some of those lower tax rates in the future, you may pay less in taxes on the money than if you converted it.

The current tax brackets and rates will go back to pre-2018 levels at the end of 2025, unless Congress takes action before that time. Therefore, while tax rates are low now, odds are good that they’ll be higher after 2025.

Reference: CNBC (November 27, 2019) “Moving all your IRA money to a Roth means losing some tax benefits”

Suggested Key Terms: Tax Planning, Financial Planning, Probate Attorney, IRA, Roth Conversion, Required Minimum Distribution (RMD), Charitable Donation, Qualified Charitable Distribution

Share your estate plan

Share Your Estate Plan Now to Protect Your Family When You Are Gone

If one child will receive more than his siblings, even though his need is obviously greater, will that shared info create fighting between the children? And should children even have advance knowledge that they are going to receive an inheritance? These are some of the questions examined in the article “Disclosing estate plans in advance can save strife later” from The Indiana Lawyer. In most situations, advance discussions between family members are better to ensure family harmony.

Many estate planning attorneys have the “fair does not always mean equal” discussion with their clients. For some families, there is one child who is in dire need, while the others have prospered and don’t really need help. Maybe one child has special needs, or just hasn’t been as successful in life. In other cases, one child has already received substantial property from the parents, so no portion of the estate will be left to them. Regardless of the circumstances, which vary widely, having a frank discussion with all of the children is better than a series of surprises.

Research from the Federal Reserve Board shows that more than half of any given inheritance equals $50,000 or less, and more than 80% of all inheritances are less than $250,000.

With only half of what most people inherit being generally used to invest or pay down debt, most of these inheritances are spent, invested, or donated.

Regardless of the size of the inheritance, most parents expect that the beneficiaries of their estate will protect and preserve their legacy and use the money wisely. That is not always the case. If the parents want heirs to be careful with inheritances, they need to have a plan that will prepare heirs to act as stewards of their inheritances. The plan may be as simple as a series of conversations about saving and investing, or making charitable donations. It might also be complex, like meeting with the parent’s financial advisor and estate planning attorney and discussing wealth transfer and the potential to grow the wealth for another generation.

Families with larger estates often involve their children in annual gifting to get them used to the experience of receiving significant assets and learning how to manage these gifts. This has the added impact of allowing the parents to see how their children will respond to windfalls, which may guide how they distribute wealth in their estate plan. If one child is a repeat spendthrift, for instance, a trust may be a better way to pass the wealth to the child, with a trustee who can determine when they receive assets.

Families who have worked hard to leave their children with an inheritance, regardless of the size, should prepare their children by teaching them, through the parent’s actions, how their values impact their wealth, and how to manage it for themselves and future generations.

Reference: The Indiana Lawyer (October 16, 2019) “Disclosing estate plans in advance can save strife later”

Suggested Key Terms: Inheritance, Legacy, Wealth Transfer, Gifting

Couple discussing their retirement

Now That I’ve Finally Retired, How Do I Manage My Retirement Funds?

A retirement plan is not just funding your retirement, but figuring out how to manage your funds while you are working and when at long last you finally do retire, says the article “What do I do with my retirement plan when I retire?” from the Shreveport Times. You need a retirement plan while you are working to know how funds will be spent, which will impact how you should be saving and investing.

There are four strategic functions of money in retirement. If you know what they are, you’ll be able to do a better job of saving.

When you stop working, your income from work does too. Unless you are one of the few Americans retiring with a pension, it will be up to you to translate retirement assets into retirement income. Your first thought might be simply to start with taking out just a little bit, and live on that as best you can. Nope, that’s not a plan. The first question is: what’s is enough to live on, and the second—how long will it last?

Until those questions are answered, the other three can’t even begin to be addressed. Retirement income planning is something that many people do with professionals, because it’s not easy. This is the difficult place, where life planning and money planning meet. How long will you live? No one knows. How long will your assets be able to produce the income you need? Hard to know one without knowing the other. However, there are still ways to plan, so you can enjoy your retirement.

What’s your level of liquidity? These are things that you own that are not cash but can be turned into cash. Money in a checking account? 100% liquid. Funds in investment accounts are fairly liquid, but not as much as cash. Real estate is not liquid, unless you are in a booming market. What about any small business that you own? Probably not as liquid as you think.

There’s also something called “technical liquidity” and “practical liquidity.” Let’s say you are taking all of the interest and dividend interest from your investments but decide you need $50,000. What happens if you take that $50,000 from your investments? The interest and dividends that were being created by that sum are no longer being generated.

Contingencies are the big unexpected costs. The biggest one faced by retirees is long-term care. People underestimate this cost all the time. It’s not just the cost of a nursing home, although that is a huge cost. What about health that declines slowly, over an extended period of time? There will be caregivers who need to be paid, and care services. That can reach $10,000 a month easily in most states.

Legacies are another consideration. If you want to leave behind something for your heirs, or want to fund a cause or service that you are passionate about, will you build that into your retirement funds or your estate plan?

Reference: Shreveport Times (November 30, 2019) “What do I do with my retirement plan when I retire?”

Suggested Key Terms: Retirement Savings, Contingencies, Legacies, Investments, Liquidity, Pensions

Stethoscope chestpiece on a calculator

The Medicaid Medically Needy “Spend-Down Program” – What You Need to Know

If you’ve been denied Medicaid benefits because you have too many assets or too high an income, don’t give up. There are available programs that may enable you to qualify for Medicaid benefits, despite this setback. Each state may offer different programs, and the Affordable Care Act (ACA) has added new ways to obtain coverage. This article addresses the “spend down program” offered in every state.

Medicaid Spend-Down Program – The Basics

To qualify for Medicaid benefits, your income and assets may not exceed a certain amount set by law. If these items do exceed the legal limits, you may still qualify after a spend-down period. The medically needy spend-down program helps individuals over the age of 65, and some younger individuals with disabilities. To be eligible for this program, you must not be receiving public financial assistance.

Exempt & Non-Exempt Assets

It is not necessary to sell off everything you own to qualify for the spend-down program. You may keep a certain amount of “exempt assets,” such as the home you live in, your car (used for transportation), household furniture, clothes, jewelry and other personal items. None of these assets affect your eligibility, regardless of their value (unless you have high equity, say $1 million in an asset, in which case you may need to spend that down).

Non-exempt assets, on the other hand, do affect your eligibility for the spend-down program. These assets include bank accounts, stocks, investments, and cash over $2,000 for an individual or $3,000 for a married couple.

Amount of Income You Can Have to Apply

It does not matter how much income you have when you apply. The more income you have, though, the more medical expenses you must incur before your coverage can start. The way you spend down this income is by spending it on medical expenses, until you reach the income requirements for Medicaid. Interestingly, you just need to incur medical costs. You don’t have to actually pay them.

In addition, you can pay down accrued debt to spend down your income. Therefore, paying down credit card bills, car payments, or mortgage debt can count towards your spend down. Another tactic you can use, is to pay excess monthly amounts on old medical bills.

Seeking Professional Assistance

Medicaid programs are different in each state, and the laws change frequently. If done wrong, you could end up incurring penalties instead of obtaining benefits. It may be a good idea to enlist the help of a Medicaid specialist or elder law attorney to walk you through the process in a way that will avoid these types of penalties.

Resources:

National Council on Aging. “Benefits Checkup” (Accessed November 28, 2019) https://www.benefitscheckup.org/fact-sheets/factsheet_medicaid_la_medicaid_spend_down/#/

U.S. News and World Report. “How a Medicaid Spend Down Works.” (Accessed 28, 2019) https://money.usnews.com/money/retirement/baby-boomers/articles/how-a-medicaid-spend-down-works

Suggested Key Terms: Medicaid spend down, medically needy spend down, Medicaid eligibility

Step up in basis

Can You Explain the Concept of Step-Up Basis?

If you inherit assets—especially real property—you need to understand the step-up in basis rules. These rules can save you a lot of amount of money on capital gains and depreciation recapture taxes.

Motley Fool’s recent article on this subject asks “What is a Step-Up in Basis?” The article explains that step-up in basis has significant implications for inherited property. When an asset is inherited because the original owner has passed away, in many cases, it’s worth more than when it was first purchased. To avoid a huge capital gains tax bill when the inherited property is sold, the cost basis of the asset is modified to its value at the time of its owner’s death. This is called a step-up in basis. Note that this only applies to property transferred after death. If a property was gifted or transferred before the original owner dies, the original cost basis would transfer to the recipient.

This is a gigantic tax benefit for estate planning, regardless of whether you go ahead and sell the inherited asset immediately or hold on to it for a time. While a step-up in basis can let heirs avoid capital gains taxes, it doesn’t allow heirs to avoid estate taxes that apply to big inheritances.

The estate tax this year is imposed on property in excess of $11.4 million per individual and $22.8 million per married couple. Therefore, if you and your spouse leave a $25 million estate to your heirs, $2.2 million of this will still be taxable, even though your heirs’ cost basis in assets they inherited will be stepped up for capital gains tax purposes.

There are many strategies that a qualified estate planning attorney can advise you on to avoid estate taxes, but step-up in basis doesn’t exclude the value of inherited property from a taxable estate all by itself.

There are two significant ramifications of stepped-up cost basis regarding inherited real estate assets. First, like with other assets, you don’t have to pay capital gains on any appreciation that occurred before you inherited the property. Selling an investment property after years of holding it, can mean a massive capital gains tax bill. Therefore, a stepped-up cost basis can be a very valuable benefit. A step-up in basis can also give you a larger depreciation tax benefit. The cost basis of residential real estate can be depreciated (deducted) over 27½ years: a higher number divided by 27½ years is a greater annual depreciation deduction than a smaller number would produce.

Estate transfers are pretty complicated, so work with a qualified estate planning attorney.

Reference: Motley Fool (November 21, 2019) “What is a Step-Up in Basis?”

Suggested Key Terms: Estate Planning Lawyer, Tax Planning, Financial Planning, Estate Tax, Unified Federal Estate & Gift Tax Exemption, Step-Up Basis

Family for Christmas and Holidays

Holiday Gatherings Often Reveal Changes in Aging Family Members

A look in the refrigerator finds expired foods and an elderly relative is asking the same questions repeatedly. The same person who would never let you walk into the house with your shoes on now, is living in a mess. The children agree, Mom or Dad can’t live on their own anymore. It’s time to look into other options.

One of the biggest questions, according to the Cherokee Tribune & Ledger-News’ article is “How to pay for long-term care.”

The first question involves the types of facilities. There are many different options but the distinctions between them are often misunderstood. Assisted living facilities provide lodging, meals, assistance with eating, bathing, toileting, dressing, medication management and transportation. However, a skilled nursing facility adds more comprehensive health care services. There’s also the personal care home, which provides assisted-living type accommodations, but on a smaller scale.

The next question is how to pay for the residential care of an elderly family. This weighs heavily on the family. That elderly person is often the one who did the caregiving for so many years. The reversal of roles can also be emotionally difficult.

There are a few different ways people pay for care for an elderly family member.

Long-term care insurance, or LTC insurance. Few elderly people have the insurance to cover their residential facility stay, but some do. Ask if such a policy exists, or go through the piles of paperwork to see if there is such a policy. It will be worth the search.

Veteran’s benefits. If your loved one or their spouse served during certain times of war, is over 65 or is disabled and received an honorable discharge, he or she may be entitled to certain programs that pay for care through the Department of Veterans Affairs.

Private pay. If your loved one has financial accounts or other assets, they may need to pay the cost of their residential facility from these assets. If they don’t have assets, the family may wish to contribute to their care.

Another route is to apply for Medicaid. An elder law attorney in their state of residence will be able to help the individual and their family navigate the Medicaid application, explore if there are any options to preserving assets like the family home, and help with the necessary legal strategy and documents that need to be prepared.

Meet with an elder law estate planning attorney to learn what the steps are to help your elderly loved one enjoy their quality of life, as they move into this next phase of their life.

Reference: Cherokee Tribune & Ledger-News (November 30, 2019) “How to pay for longterm care.”

Suggested Key Terms: Assisted Living Facility, Skilled Nursing Home, Veterans Benefits, Medicaid, Personal Home Care

Estate Tax Changes

What Happens to Estate Tax Benefits After 2025?

What will happen to the Estate Tax in the coming years? For starters, you may recall that the 2017 Republican tax reform legislation roughly doubled the estate and gift tax exemption.

This means starting in 2019, people are permitted to pass on, tax-free, $11.4 million from their estate and gifts they give before their death. Couples can pass on twice that amount, or $22.8 million.

These higher levels expire in 2026, but those who make large gifts while the exemption is higher and die after it goes back down, won’t see the estate tax benefit eroded, the IRS announced recently via new regulations.

“As a result, individuals planning to make large gifts between 2018 and 2025 can do so, without concern that they will lose the tax benefit of the higher exclusion level once it decreases after 2025,” the agency said in a press release.

Yahoo Finance’s recent article, “IRS Says Millionaires Can Keep Estate Tax Benefits After 2025,” says that the exemption increase was a big priority for Republicans in the 2017 tax overhaul.

This exemption decreased the number of individuals who’d be subject to the 40% estate tax by about two-thirds.

The exemption was $5.5 million prior to the law change.

However, Democrats are looking to reverse those changes, if they sweep the House, Senate and White House in the 2020 national elections.

Nearly every Democratic presidential candidate would like to see the estate tax apply to a greater number of wealthy families.

Senator Bernie Sanders has called for the estate tax, to begin when fortunes are worth at least $3.5 million. He has also proposed rates as high as 77%.

Reference: Yahoo Finance (November 22, 2019) “IRS Says Millionaires Can Keep Estate Tax Benefits After 2025”

Suggested Key Terms: Estate Planning Lawyer, Tax Planning, Probate Attorney, Estate Tax, Gift Tax, Unified Federal Estate and Gift Tax Exemption

Estate Tax Portability

What Does ‘Portability of Estate Tax’ Mean?

Portability is the ability to move a certain amount of money that can be left to others tax-free for estate planning purposes, as described by WMUR9’s article “Money Matters: Portability and estates.” The Tax Cuts and Jobs Act increased the exclusion significantly. In 2019, it is $11.4 million per person.

The portion not used by the deceased spouse can be transferred to the surviving spouse. If that were not good enough, the exclusion is indexed for inflation. However, this exemption is due to end in 2025, unless the law is extended. If it does end, it will probably lower to one-half of the current level.

Before the tax law changes, most estate planning lawyers would set up a trust for each spouse, known as an A/B trust. When the first spouse died, an amount equal to the exclusion would go to the B trust. The assets in the trust would be outside of the estate of the survivor and would not be subject to estate taxes. This is also known as a credit-shelter bypass trust.

Any assets in the estate of the first spouse to die, would be given to the surviving spouse or could go into another trust, depending upon the plan for the estate. The trust was often called an “A” or “marital” trust. Transfers to spouses are not usually subject to estate tax, so assets passing to the “A” marital trust would be free from estate tax. Upon the death of the survivor, their exclusion would be applied to the assets in the “A” trust. This was done so that both spouses received the benefit of their exclusion.

However, with the new tax law, the first to die uses the exclusion against assets in their estate.  Any unused exclusion amounts can then be used by the survivor, along with their own, when they die.

It seems like this may make a lot of things simpler, but that’s not necessarily so. Here are a few reasons:

  • The unused applicable exclusion from a prior marriage is not usually available. You can only use the amounts from your last deceased spouse. This needs to be taken into consideration for those contemplating a second marriage.
  • The unused exclusion amounts are not indexed for inflation. If it’s likely that the property the surviving spouse receives will be greater than the unused exclusion, the estate plan should consider using a “B” trust, so the appreciation may be excluded from the survivor’s estate tax exclusion.
  • To use portability, an estate tax return must be filed. The executor of the estate must make an election to do so, by filing a return. Even if the estate would otherwise not require a return to be filed, you must file an estate tax return, if you think portability may be used in the future.

Estate planning documents prepared before 2010 may no longer work to achieve tax savings. It is recommended that they be reviewed in light of these and other tax law changes.

Reference: WMUR9 (Nov. 21, 2019) “Money Matters: Portability and estates”

Suggested Key Terms: Portability, Estate Tax, Estate Planning Lawyer, Exclusion, Inflation, A/B Trusts, Credit Shelter Bypass Trust

Elder Law DIY?

Can You Tackle Elder Law on Your Own?

What usually happens when people do their own estate planning or work on elder law issues, without a lawyer who has years of practice? They may not incur the costs on the front end, but the costs, in financial and emotional terms, often arrive just when the individual or their family is most vulnerable. That message comes through loud and clear in the article “Do-it-yourself elder law estate planning can be risky” from a recent article in the Times Herald-Record.

Let’s clarify the two different areas:

  • Estate planning is about leaving assets to heirs with a minimum of court costs, legal fees and avoiding will contests.
  • Elder law is concerned with protecting assets from the cost of long-term care and empowering people who will be able to make legal, financial and medical decisions on your behalf, if you become incapacitated.

Two of the most important documents in an elder law estate plan are the Powers of Attorney (POA) and health care proxies. If these forms are not prepared correctly, problems will ensue. In some states, like New York, the POA form is long and complicated. Banks and financial institutions will refuse to recognize the form, if they are not completed correctly.

There will be similar issues to a do-it-yourself health care proxy. Here’s just one example of the many things that can go wrong: an agent may not make decisions about withholding certain extreme life support measures, even if they are in possession of a valid health care proxy. There needs to be a living will from the individual that explicitly states their wishes regarding withholding heroic means and/or artificial measures. Without the proper document, the person could remain on life support for months or years, even if this was not their wish.

A do-it-yourself approach leaves much to chance. As a result, the potential for problems is enormous. A far better solution that spares spouses and loved ones, is to work with an experienced estate planning lawyer. Can you put a price on peace of mind?

Reference: Times Herald-Record (Nov. 23, 2019) “Do-it-yourself elder law estate planning can be risky”

Suggested Key Terms: Estate Planning Lawyer, Elder Law, Power of Attorney, Health Care Proxy, Living Will, Statutory Gifts Rider, Nursing Home, Life Support

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