Stapleton Elder Law

Subtle Change to HUD Reverse Mortgage Rules Could Spell Disaster for Surviving Spouses

Two years ago, a victory for the elderly occurred when advocates succeeded in having more rights and protections put into place for the surviving spouse of a senior with a reverse mortgage.

Protections put into place two years ago, could now be at risk as a direct result of a very subtle language change from the Trump administration’s proposed budget request for the Department of Housing and Urban Development (HUD). The most vulnerable person—a surviving spouse who did not sign the mortgage documents—could be put in a terrible position and face foreclosure on the family home.

The New York Times recently published an article, “2 Senators Question Effects of a Reverse Mortgage Proposal” that two U.S. Senators sent a joint letter to Ben Carson, the Secretary of HUD and Mick Mulvaney, the Director of the Office of Management and the Budget. They sent the letter two months ago to get some clarity on the proposed wording in the budget request. Senator Marco Rubio (R-FL) and Senator Catherine Cortez Masto (D-NV) asked whether the agency was seeking to reverse the previous change in policy.

There’s been no response from HUD about its intent for reverse mortgages, which allow the elderly to use the equity they’ve built up in their homes. That is causing concern, because reverse mortgages are seen as crucial in helping an aging population plan for retirement. Before the change in policy two years ago, a surviving spouse who hadn’t signed the mortgage frequently had to pay what was left on the loan in full or risk being evicted in a foreclosure. The two senators say the old policy is a “loophole” that had “compounded the stress faced by widows and widowers at a time when they were already grieving the loss of their spouse.”

The specific language in question is a proposed change in the National Housing Act that says, in regard to reverse mortgages, that a mortgagor “shall not include the successors and assigns of the original borrower under a mortgage.” The phrase is in a section of the Act providing the types of reverse mortgages eligible for insurance guarantees from the Federal Housing Administration, a division of HUD.

The revised wording can be read as suggesting that a surviving spouse isn’t necessarily entitled to stay in the home.  However, at the same time, Trump’s budget proposal includes a new line that would give the Secretary of HUD broad discretion to determine if a loan is payable after the death of the borrower.

“HUD’s proposed changes to reverse mortgages included in the last budget raised concerns that the administration may be seeking to undo hard-fought existing protections,” Senator Cortez Masto said in an emailed statement on Tuesday. “I hope the administration can make clear that they’re not looking to push seniors out of their homes after the death of their spouse.”

The senators have not yet heard a response from the housing agency about its intention for the language change. One expert noted that even if this is simply a case of bad drafting, it could lead to a bad law that would harm many seniors.

The increase in home prices, along with the enormous number of baby boomers who are reaching retirement age without sufficient savings in place, point to a potential surge in the number of reverse mortgages. Clarifying this issue to protect the elderly from facing an even larger upheaval at an already challenging time in their life is paramount.

Reference: The New York Times (August 8, 2017) “2 Senators Question Effects of a Reverse Mortgage Proposal”

To learn how you can best prepare for retirement and beyond, please visit our website.

 

Would a “Life Estate” Work for Your Family?

Here are some basics on the use of a “life estate” that will be helpful to start a discussion about whether or not this planning tool might be a good fit for your family.

When an adult son or daughter has a life estate on a parent’s home and is thinking about selling the house, it’s time to sharpen some pencils and start doing the tax calculations.

NJ.com’s recent article, “What a 'life estate' means for your home,” discusses how this estate planning strategy works. A life estate gives the holder the legal right to the possession of real estate.

The owner of the remainder interest also has an ownership interest in the property. However, the life estate holder has the right of possession.

The life estate holder can live in the property or rent it and keep the money. He or she is responsible for the maintenance and expenses of the property. At the life estate owner's death, the life estate expires, so it can’t be transferred to someone else.

The tricky part comes when you’re a life estate holder and living in the home and it is sold: both the life estate holder and the remainder interest owner must agree to sell, because the buyer will want to take a 100% ownership interest and possession of the property.

The IRS has created life estate and remainder interest tables to figure out the value of each interest. The way it works, in general, is the older the life estate holder, the less ownership interest he or she will have and the more ownership interest there will be for the remainder interest holder.

If the home is sold, the proceeds must be divided between the life estate holder (usually the parent) and remainder interest owners (the child), according to the IRS tables. If the home has appreciated considerably in value, there may also be capital gains taxes that will be due.

The IRS rules state that if the life estate owner has lived in the home in two of the last five years before the home is sold, he or she can exempt up to $250,000 of capital gains from tax with the primary residence exemption. However, the remainder interest owner can’t use that exemption because he or she isn’t entitled to possession—they can’t claim it as a personal residence.

This is a smart time to speak with an experienced estate planning attorney to make sure that the transaction is done properly and to avoid paying more taxes than necessary.

Reference: NJ.com (July 27, 2017) “What a 'life estate' means for your home”

To learn more about life estates and other estate planning strategies, please visit our website. 

Keep Your Retirement Income in Your Pocket, Not the IRS!

Taxes are often overlooked when considering retirement income and budgeting. Just as you need a tax strategy in place when you are accumulating savings, you also need a tax strategy for retirement.

There’s a serious flaw in many retirement plans, as reported in to Kiplinger’s article, “Keep More of Your Retirement Savings with Tax-Bracket Planning.” People are so busy focusing on saving money, watching their nest egg grow and considering where they want to live during retirement, they forget to address the problem of taxes during retirement.

It’s not just about how much money you’ve saved for retirement, it’s how much you get to keep after taxes.

To optimize your savings, you need to build a tax-efficient portfolio. It should contain the following:

• Tax-efficient investments. These are investments with the lowest taxes compared to their interest or dividend income;
• Tax-efficient withdrawal strategies. Use differently taxed accounts that offer flexibility for income purposes; and
• Tax-efficient planning. Get a long-term tax plan that focuses on lower taxes over your entire retirement, not a given year.

Don’t Pay Triple Taxes. Retirees who don’t plan effectively for distributions from IRAs or other qualified plan distributions could easily pay three times their tax rate. You can avoid this by taking control over how much income you pay yourself. Your spending needs may be less, so you can keep that amount low by managing your income sources effectively to get the most tax efficiency over your lifetime.

Understand Your Tax Bracket. As a retiree, you need to stay within the 15% tax bracket for the rest of your life. Effective tax planning must begin in your first year of retirement. Don’t assume your tax plan is ideal if you don’t “fill” the entire 15% tax bracket in your early retirement years. The goal is to “fill” every retirement year with taxable income to the upper limit, even if you don’t need that income.

There are other ways that you can minimize your tax liability. A few additional ideas: withdraw cash on a tax-free basis in the form of loans from a universal life insurance policy, if you need more income. Consider a home equity line of credit—the interest is tax deductible. An estate planning attorney with experience in tax law will be able to help you devise a tax-efficient retirement plan that complements your estate plan.

Reference: Kiplinger (July 2017) “Keep More of Your Retirement Savings with Tax-Bracket Planning”

To learn more about tax and retirement planning, please visit our website.

Some States are More Generous than Others When it comes to Retired Federal Employees

If you have a pension from the federal government, here’s another item to add to your check list when considering taxes and retirement.

Taxes are a big consideration when it comes to deciding where to live during retirement, and according to a recent report from Kiplinger, “States That Tax Your Federal Government Pension the Most,” the difference in how federal government pensions are taxed—or not taxed, as the case may be—varies considerably. Some states treat this kind of income very differently than private pensions.

When you look at a retirement destination, you might consider avoiding states that tax federal government pensions. It could save a federal retiree many thousands of dollars in state taxes every year throughout retirement.

There are some states that will tax all pension income, such as California, Connecticut, Nebraska, North Dakota and Vermont—as well as the District of Columbia. All of these states, except North Dakota, make Kiplinger’s list of “Least Tax-Friendly States for Retirees.”

Wisconsin is also tough on retiree taxes, but does make exceptions for the commissioned corps of the National Oceanic and Atmospheric Administration (NOAA) and the Public Health Service (such as the Surgeon General). Their pensions are exempt along with those of military veterans.

Those collecting federal pensions need to consider four other states: Arizona, Montana, Ohio, and Utah. Like many states, these four states exempt some retirement income from taxation, including income from federal sources. But the difference is that their exemptions are quite limited compared with the average.

For example, in Montana, only $4,110 of income can be exempt, and the retiree’s adjusted federal gross income (AGI) must be less than $34,260 to qualify.

In Arizona, the exemption is even lower at $2,500, but it’s not limited by income.

Ohio offers a tax credit. However, the most you can deduct is $250. Utah is a tax-credit state. Their maximum credit is $450. Ohio and Utah limit this credit based on income.

Another thing to keep in mind: in some states, even those who are not great about traditional federal pensions, railroad retirement benefits and military pensions receive special exemptions.

This should be part of a conversation with your estate planning attorney, when looking into retirement and estate tax responsibilities and how your state or a state you are considering relocating to, treats different kinds of pensions and assets.

Reference: Kiplinger (May 16, 2017) “States That Tax Your Federal Government Pension the Most”

To learn about planning for your retirement and beyond, please visit our website.

 

Grandchildren and IRAs Work Together for an Early Start

It’s never too early to help a family member build their own retirement nest egg.

Summer usually finds teens and college students working at summer jobs, and for many, proudly pocketing their first earnings. But an interesting perspective comes from Kiplinger Retirement Report, as explained in “Seed a Roth IRA for Your Grandkids,” that grandparents can use summer earnings as a teachable moment about retirement planning. Grandparents can make contributions to a Roth IRA for their grandchildren, who can use those funds in later years to build retirement income or even purchase a home.

As an illustration, if you were to contribute $2,000 a year over four years beginning when a grandchild is 15—with a modest 6% annual rate of return—those contributions will grow to more than $143,000 by the time the grandchild is age 66.

If he or she has a summer job or works while attending school, a grandchild has most likely earned income to be able to contribute to a Roth IRA. That contribution can't be more than he or she earned during the year or the maximum of $5,500 (in 2017 per the IRS), whichever is less. One idea is to deposit the money into the account for your grandchild and let your grandson or granddaughter hang onto his or her earnings. If she was to earn $3,500 from a summer job, then she can use it to buy a car. If you give $3,500 to the grandchild, then that money can be contributed to the Roth IRA.

The contribution you make to your grandchild is considered a gift to the child, so be certain to arrange that with your other gifts for the year. A grandparent can give up to $14,000 per year per person, without having to file a gift tax return (or a total of $28,000 to one person from both grandparents).

You can also “pre-fund” an account. However, in the event your grandchild's job falls through or she earns less than was expected, you’ll need to make ensure the excess contribution and its earnings are withdrawn from the account before the next tax filing deadline.

Until your grandchild turns 18 or 21, and depending on the laws of your state, you’ll be able to control the money, and then your grandchild will be able to use it, however he or she wants.

Reference: Kiplinger Retirement Report (May 2017) “Seed a Roth IRA for Your Grandkids”

To learn more about this and other estate planning strategies, please visit our website.

 

Delaware To Repeal Estate Tax

“Despite facing a $400 million budget hole, Delaware is the latest state to repeal its estate tax—as of Jan. 1, 2018.”

Delaware’s Governor John Carney Jr. recently signed an estate tax repeal bill, two days after signing the 2018 state budget, which includes tax hikes on real estate transfers, tobacco, and alcohol.

Wealth Advisor’s recent article, entitled “Latest State To Repeal Estate Tax: Delaware,” notes that Delaware is thinking that the very wealthy don’t have to move to Florida. The thought is that if they stay in Delaware—rather than changing residency to avoid the Delaware state estate tax—they will contribute to the state’s coffers by paying personal income taxes.

“We came to the realization that it was absolutely necessary to do [estate tax repeal] because we were losing more in income tax than what we would gain in estate tax,” says Rep. Mike Ramone, the bill’s primary sponsor and a small business owner.

A 2015 report by the Delaware Economic and Financial Advisory Council on Revenues described the estate tax as a “small, volatile source of tax revenue.” That group recommended the tax’s repeal, based in part on its negative influence on personal income tax revenues. The estate tax brought in a high of $16.2 million in 2011, a low of $1.3 million in 2014, and $9.3 million last year.

The state estate tax was initiated by Democratic Governor Jack Markell in 2009, as a temporary tax when the budget deficit was $800 million. The state exemption is tied to the federal estate tax exemption. As a result, it starts this year for individuals who die with more than $5.49 million in assets. The Delaware top rate is 16%, compared to the federal tax of 40%.

One proponent of the repeal cited the estate tax as the impetus for at least 10 wealthy clients to change their residency to no-income-tax states, such as Florida, where they had vacation homes.

In 2017, there are 18 states plus the District of Columbia that impose either estate or inheritance taxes or both. The Delaware change will drop that number to 17 states, plus D.C. next year. New Jersey’s estate tax will also be eliminated in 2018, but that state will keep its inheritance tax in effect.

Tennessee (2016), North Carolina and Indiana (2013), along with Kansas, Ohio, and Oklahoma (2010) all scrapped their estate or inheritance taxes in recent years.

Reference: Wealth Advisor (July 10, 2017) “Latest State To Repeal Estate Tax: Delaware”

To learn more about tax planning and your estate plan, please visit our website.

States Cutting Estate Taxes to Attract Affluent Residents

It is hard to believe that as many as nine states have eliminated or lowered estate taxes in the past three years. More states are joining the estate tax revolution.

Minnesota and Maryland are increasing their estate tax exemption, trying to make their states more attractive to wealthy residents. Maryland will increase a $3 million exemption to $4 million in 2018, and Minnesota upped its exemption to $2.1 million, retroactive to January. Not to be left out, New Jersey increased its per person exemption to $2 million this past January.

If that wasn’t enough, according to, Fox Business’s article, “Why More States Are Killing Death Taxes,” the Garden State plans to totally eliminate its estate tax, making New Jersey one of about six others that have ended their estate taxes in the last ten years.

The tax-cutting trend stems from an intense competition between the states for affluent and wealthy taxpayers. Residents owe income taxes every year. However, there are those who are willing to move out-of-state to avoid death taxes. In addition, with the federal estate and gift tax exemption increasing to more than $5 million, states with death taxes really stick out.

There are two holdouts, Massachusetts and Oregon. These two are the only states with estate-tax exemptions of $1 million or lower, compared to nine in 2009. The tax in both states will increase annually because neither adjusts for inflation. Some Massachusetts lawmakers are concerned about losing residents to other states because of its estate tax, a $400 million revenue generator last year. Massachusetts is looking at upping the exemption to half the federal level and maybe excluding the value of a residence.

It’s a different story in Oregon where efforts to raise the exemption have met with resistance in the legislature. The estate-tax revenue of $200 million for the two-year cycle ending June 30 is 50% higher than forecast, which has been helped by strong housing and financial markets. Nevertheless, few people are expected to leave Oregon to avoid its estate tax.

In another six states, it’s the inheritance tax that is creating pressure on the government. An inheritance tax is payable by the person who inherits assets, not the estate of the person who died. Inheritance tax rates and exemptions often vary, according to the heir's relation to the decedent. For instance, in Nebraska, there’s no tax on assets left to a spouse, a top rate of 1% on assets passed to lineal relatives or siblings and a top rate of 18% on assets left to non-relatives.

As for New Jersey and Maryland, here are some further details: while both states have trimmed their estate tax, they have not yet modified their inheritance taxes. At least Maryland has large exemptions to its inheritance taxes. New Jersey’s estate tax actually exempts lineal descendants.

Reference: Fox Business (June 16, 2017) “Why More States Are Killing Death Taxes”

Please visit our website to learn more about estate taxes and tax planning. 

Leaving a Vacation Home to the Next Generation

Unintended consequences can occur when dividing up real property, which is often harder to distribute than investment accounts or savings accounts. Planning for real property division must take into account the different circumstances of your heirs.

You may have envisioned a time in the future, when your children and grandchildren enjoy the same lakeside home as you have for years after you’re gone, and are pleased with the idea of leaving the family vacation home to the next generation. But think again, says a recent article in Financial Planning, “Save clients from tax pitfalls, family strife when passing on that lake cabin,” because your vision may not translate into reality.

Some of the kids may be attached to the family vacation home and want to keep it. If possible, the best solution is a buyout among the siblings. That’s not as simple if finances don’t allow it, and the sentimental siblings are forced to sell, resulting in hard feelings. Another option is to put the vacation home in an irrevocable trust to remove it from the estate.

In addition to a need for cash, one heir may reside too far away to enjoy the home regularly, another heir may have a spouse who doesn’t want to use the vacation home or another heir may be unmarried without children and has no need for a large vacation home. Family discussions should take place while original vacation homeowners are still alive and healthy, in order to eliminate a great deal of frustration and stress.

Remember, a vacation home sale doesn’t qualify for the $250,000 capital gain exclusion (or $500,000 for married couples filing jointly) that can apply to the sale of a principal residence. A large gain on a vacation home might be taxed at the top 20% rate on long-term capital gains. There’s also the 3.8% surtax on net investment income, as well as the potential for state income tax. But maintaining the vacation home and leaving it to the heirs as an inheritance, doesn’t create an income tax bill because there’s step-up basis to the date of-death value. This wipes out the capital gains tax on prior appreciation.

When the kids are older, family discussions while both parents are alive can help make estate planning decisions that everyone likes. The kids might want to share the house and maintain it. If one child isn’t as financially secure as the other, he may want to inherit cash rather than the property. If that’s honored by the parents, they can state in their estate plan that one child will get the house and the other will get an equivalent value of other assets. The real estate appraisal can take place at the time of death. Frequently, one child purchases the family home from the estate of the parents, and other siblings buy their own vacation home—perhaps with their own inheritance. This makes everyone happy.

There are a variety of ways to leave the vacation home to the next generation, including creating an irrevocable trust that takes the property out of your estate. This could lead to capital gains issues for your heirs, who will lose the basis step-up. It may be possible to decant the trust, or move the assets to a new trust, with different terms.

An experienced estate planning attorney will be able to help you figure out the most realistic way to share your favorite country home in such a way that will not create a hardship for family members.

Reference: Financial Planning (May 23, 2017) “Save clients from tax pitfalls, family strife when passing on that lake cabin”

Please visit our website to learn more about legal strategies to protect your property and other assets, during your lifetime and beyond.

 

Are You Prepared for Twists and Turns on the Road to Retirement?

Planning for retirement is like driving into a mountain range.  Everything looks peaceful, until you start ascending. Then the hairpin turns and switchbacks begin!

Five major challenges need to be addressed once you are about five years away from retirement, says Kiplinger in a recent article, “Near Retirement? 5 Plans You MUST Have in Place.” This is the time when you may want to bring in some professional help, rather than go it alone.

You may be ready to move from accumulating money to protecting what you already have. At this point, there are some important decisions that need to be made. For example, you will need to decide when to take Social Security, how to take your pension (if you have one), how to structure your savings to be sure you don’t run out of money and how to plan for taxes, inflation and long-term care costs.

Here’s the five “must haves” to help you with your retirement challenges:

• Income plan: the top goal in retirement planning is creating a strategy that ensures you don’t run out of money.
• Protection plan: unanticipated events like the death of your spouse or serious illness, can wreak havoc with retirement goals.
• Growth plan: examine your glide path when you’re near or in retirement to reduce the risk in your portfolio and to hedge against inflation.
• Tax plan: taxes can impact a hard-earned nest egg without proper planning.
• Estate plan: be certain that your family, friends, and favorite charities are addressed and that you document your wishes. Create and regularly review your plan with an experienced estate planning attorney so you don’t burden your loved ones with those decisions and possible issues.

This is the time when the experienced professionals can help you navigate the challenging decisions and complex calculations ahead. Even if you have spent your career as a business owner or high level executive who managed your 401(k)s and investments without help in the past, what’s coming will be more challenging. An estate planning attorney can help navigate a smoother ride to retirement.

Reference: Kiplinger (May 2017) “Near Retirement? 5 Plans You MUST Have in Place”

Please visit our website to learn more about legal solutions to your retirement challenges.

 

Retirees: Don’t Miss These Special Tax Tips

Certain tax deductions are available only to people age 65 and up. Don’t wait for Washington to re-write the tax law, if you are doing some mid-year tax planning.

There are ways to limit how much you owe in taxes, and according to a recent article in Kiplinger, “Retirees, Cut Your Taxes With These Moves,” you should be proactive about trimming any possible taxes by making the most out of what’s available right now.

Forms. Make sure that you have the right form for 0% gains. Investors with taxable income up to $37,650 on a single return and $75,300 on a joint return, get a nifty 0% tax rate for their long-term capital gains. But while all the gains are tax-free, they still have to be reported on your tax return. If you just report your profits on your Form 1040, they’ll be taxed in your top tax bracket. It is better to report your gains on Form 8949 and carry them over to Schedule D. This will apply the 0% rate to qualifying profits.

Standard Deduction. Use a supercharged standard deduction for taxpayers age 65 and older. Younger taxpayers get the 2016 standard deduction of $6,300 (married couples, $12,600). But at age 65, the write-off grows to $7,850 for singles and $13,850 for a couple, if one spouse is 65 or older ($15,100 if both spouses are 65 or older). If that number is greater than the total of your itemized deductions, you’ll avoid the hassle of itemizing and save money.

The “Angel of Death” Tax Break. The current tax basis of inherited assets is their value on the date of death of the previous owner. Congress says that stepping up basis to date-of-death value will save heirs more than $32 billion this year. If you sold inherited assets, don’t leave these savings on the table.

Medicare Premiums. Similar to other health insurance premiums, Medicare expenses count as a deductible medical expense. However, they are generally deductible only to the extent that they exceed 7.5% of adjusted gross income. However, if you’re self-employed, you’re not limited by the 7.5% threshold.

IRAs. If you’re married and your spouse is still working, he or she can contribute up to $6,500 a year to an IRA that you own, if you were at least 50 last year (otherwise, the limit is $5,500.). If you have a traditional IRA, contributions are allowed up to the year you reach age 70½. With a Roth IRA, there’s no age limit. As long as your spouse has enough earned income to fund the contribution to your account, this tax shelter is still available.

Waiver for Underpayment on Estimated Taxes. The IRS recognizes that sometimes, shifting from being an employee to a retiree can lead to mistakes on estimated tax payments. If you have a reasonable excuse, look at Form 2210 to see if you are eligible for a waiver on an underpayment penalty.

Reference: Kiplinger’s (March 2017) “Retirees, Cut Your Taxes With These Moves”

 

To learn how tax planning can impact your estate plan, please visit our website.