Klitzman Law Group, PLLC

Why You Should Not Use 401(k) Funds to Pay A Mortgage

“When it comes to your money, be careful who you listen to. Taking advice from an uninformed person can cost you dearly.”

We call it “the brother-in-law” effect. Most families have a brother-in-law who likes to think he knows everything, and he’s more than happy to share his wealth of knowledge. Trouble is, most of what he knows is wrong. A 60-year-old woman was told that she could use her 401(k) or IRA funds to pay off her mortgage and never have to pay any taxes, or not until she sold her home. This, says The Washington Post’s article “Sorry, you can’t escape income taxes by using 401(k) funds to pay off your mortgage,” is a perfect example of someone giving really, seriously, bad information.

Let’s start by clarifying how 401(k) and IRA plans work. With a traditional 401(k), contributions are made on a pretax basis. Income taxes are then due on both contributions and earnings, when distributions are taken. There is a 10% tax penalty, if the money is taken out before the account owner reaches age 59½.

Depending on the person’s income, contributions to a traditional IRA may be deductible from taxable income. Income taxes aren’t due, until the money is withdrawn. With a Roth 401(k), contributions are made after taxes have been paid, so there are no income taxes due when money is withdrawn.

Is there a loophole for mortgages? The short answer is no.

There are relief provisions for the 10% additional tax, but since this person is past the 59.5 threshold, that is not an issue in the situation described above. Distributions from a Roth IRA or a Roth 401(k) are different, but even then, there wouldn’t be anything special about the distributions being used to pay a mortgage.

While you might not incur a penalty because of the age issue, any distributions would be subject to income tax. If the money has already been taken out of the IRA, the woman may have a 60-day window to put the money back in the account without being taxed—unless she has already used this rollover treatment within the last 365 days.

There is a special provision for first-time home buyers under 59.5 to use IRA money to avoid the 10% early withdrawal penalty, but that doesn’t apply here.

Using retirement funds to pay off or pay down a mortgage requires a careful analysis of the costs, in terms of penalties, taxes, and future costs.

One potentially compelling reason would be a senior who has more than enough money saved for retirement and simply wishes to retire debt-free. Another would be a homeowner who is in a low-income tax bracket but will also be taking the standard deduction each year. If that person is paying interest on a 4.5 percent mortgage without receiving any tax benefits, then it could make sense to withdraw money from an IRA and pay off the mortgage. However, the withdrawal will be treated as income, so that needs to be part of the analysis.

Generally speaking, the best use for retirement money is retirement. Keeping accounts intact for use later in life while enjoying tax-deferred growth is the real reason for these accounts.

Reference: The Washington Post (October 30, 2019) “Sorry, you can’t escape income taxes by using 401(k) funds to pay off your mortgage”

How to Keep Giving After We Are Gone

“Chances are you have one or more charitable causes that you support on an annual basis. It is also likely that you have failed to make any provision for charity whatsoever on your death.”

Americans are a generous people, giving of our time and resources, through donations and volunteering. However, according to the article “Charitable conundrum: Why do we give up on giving at death?” from the Austin Business Journal, less than one out of nine individuals include a charitable donation as part of their estate plan.

Why do we stop giving at death? We know that the causes we care about continue to work after we are gone. There are many reasons for this, but perhaps the biggest reason behind his omission is that we tend to avoid estate planning. It’s an emotional challenge, preparing in a very real way to leave the world we enjoy with our loved ones. It’s not as much fun as going fly fishing or playing with the grandchildren.

Here are a few ways to include charitable giving in your estate plan, even when you aren’t having your estate plan created or reviewed.

Charitable beneficiaries. You can make a charity a partial beneficiary of a retirement account. They can be added as a primary beneficiary or as a contingent beneficiary. These changes can be made simply by contacting the custodian of the account and following their instructions for changing beneficiaries. Note that in certain states, spousal approval is required for any beneficiary changes. You can use this opportunity to also update your beneficiaries.

There’s a tax benefit in doing this. Charitable beneficiaries do not have to pay income tax on retirement distributions, although individuals do. Depending on the income level of an individual beneficiary, an heir could lose more than 40% of the inherited retirement account to state and local taxes.

The addition of a charitable beneficiary may restrict the ability for family members to stretch the receipt of retirement assets over time. Check with your estate planning attorney to make sure your good deed does not cause a hardship for family members.

Create a charitable IRA of your own. Another way to use retirement funds for a donation, is to roll some assets out of a main retirement account into a smaller retirement account with only charitable beneficiaries. Instead of consolidating accounts, you are doing the opposite, but for a good reason. This will allow you to manage the amount of money being left to the charity and take required or discretionary distributions from whichever account you choose.

Life insurance and annuities. Both of these vehicles use beneficiary designations, so the same strategy can be used for these accounts. Typically, the annuity must still be in the deferral state—not annuitized—and the life insurance contract must allow for changes to be made to the beneficiaries, which is true for most accounts. Note that life insurance proceeds are non-taxable to individuals and charities, and annuity proceeds are generally partially tax-free to individual heirs (amount of basis in the contract).

Talk with your estate planning attorney about the optimal strategies for making charitable giving part of your estate plan. Your situation may differ, and there may be other ways to maximize the wealth that is shared with charities and with your family.

Reference: Austin Business Journal (October 2, 2019) “Charitable conundrum: Why do we give up on giving at death?”

Planning for Care in Advance

“Perhaps one of the most difficult conversations you'll have as an adult child, is talking about end of life preparations with your parent. For many seniors, this conversation is as hard as the one about having to move to a full-time care facility.”

An aging parent’s health can fail suddenly, or they can have a fall that will unexpectedly put them into a precarious state. Therefore, it is vitally important that legal and medical arrangements be made, while they are still well enough to be an active participant in decisions, advises TAP into Roxbury in the article “Putting Together a Plan of Care.” Here are the steps to get you started:

Advance Directive: This document spells out their wishes regarding future medical care and treatment, if they are no longer able to speak or make decisions on their own behalf.

A Living Will is used to state in advance whether or not they want to have medical treatment, like a feeding tube, ventilator, or heart machine to prolong life, when death is inevitable.

A Durable Health Care Power of Attorney appoints another person to make medical decisions, if the person becomes incapacitated.

A Power of Attorney names someone who will be able to make decisions about their finances, pay bills, and manage real estate and other assets.

A Last Will and Testament provides information about what they would like to happen to their assets upon their demise and names an executor who will be in charge of carrying out their wishes.

Copies of medical insurance cards and any other insurance information, if emergency treatment is needed.

A Do Not Resuscitate (DNR), if they do not wish to be brought back to life during a medical emergency.

A list of medications they are currently taking, as well as doctor’s names and contact information.

A list of professionals, including their estate planning attorney, CPA and financial advisor, and all contact information.

Having all these documents prepared in advance of any emergency will be helpful, if they are ever needed. Keeping them in a safe and accessible location where they can be obtained quickly in an emergency is also important. Do not put them in a safe deposit box, which may be sealed upon their death.

Some seniors are reluctant to have these discussions, although they may be more comfortable having them with a person outside the family, like an estate planning attorney.

Reference: TAP Into Roxbury (October 7, 2019) “Putting Together a Plan of Care”

When Selecting Beneficiaries Gets Overlooked

“If you’ve ever spent time working through your estate plan with a professional, you know how important it is to select and update your beneficiaries. Failing to do so can result in costly mistakes—for you and your loved ones.”

Here’s one way to mess up your estate plan: naming beneficiaries not by name, but by the generic term “children.” If yours is a blended family, your stepchildren may be out of luck, according to the article “Five mistakes to avoid when naming beneficiaries” from Delco Times. In many states, stepchildren aren’t recognized if the word “children” is used. Use your beneficiaries’ full names.

Here are more mistakes that people make about beneficiaries:

Failing to name a beneficiary on every account. The great thing about beneficiary designations as that they do not go through probate and beneficiaries receive assets directly from the custodian of the account. However, if you fail to name a beneficiary, the asset, whether life insurance proceeds or the entire balance of a 401(k) account will go to your estate, and then it will need to go through probate.  For retirement accounts, your heirs will also lose the ability to stretch withdrawals over their lifetime.

Failing to name a contingency beneficiary. What if the first person passes away before you and there’s no contingency beneficiary named? The asset goes through probate, as if there were no beneficiary named at all.  If both people die at the same time, all of the funds must go through probate.

Neglecting to review beneficiary selections on a regular basis. Beneficiary designations override a will, so it’s very important to keep them current. Every few years, review the accounts that you own and see what your beneficiary designation choices are. This is especially necessary, if you have been divorced, widowed or remarried. If you fail to take your ex-spouse off an insurance policy, for instance, there’s little that can be done when you die—even if you put your wishes that a new spouse or children receive the proceeds in your will. If the dispute goes to court, your new spouse or children won’t be likely to win, no matter what your intentions may have been.

Not communicating with your partner and family members. Talking with family members and loved ones about your wishes for your legacy and asset distribution is an important way to let them know what to expect when you die. It’s not an easy conversation, but it will be helpful to all. Knowing you have a plan will alleviate them from the worry of the unknown. There’s no need to talk specific dollar amounts, unless you want to. Instead, give them a high-level overview of what your intentions are.

Some families find these conversations easier in the presence of an objective third party, like your estate planning attorney. If your estate plan includes trusts or any complex planning strategies, a family meeting provides a means of explaining the plan and the processes involved.

Reference: Delco Times (October 6, 2019) “Five mistakes to avoid when naming beneficiaries”

How Many Ways Can You Ruin Your Retirement? Plenty!

“The fantasy of being your own boss and filling your days as you wish is a powerful one. However, if you’re not careful, you could spend those golden years trying to earn more or pinching every penny.”

There are just about as many ways to ruin your retirement, as there are light bulbs on Broadway, or stars in the sky. You get the picture: it’s easy to ruin your retirement, says Reader’s Digest in the article “15 Retirement Mistakes That Will Ruin Your Retirement.” These useful tips deserve your attention.

Using your retirement accounts like a checking account. Treat your 401(k) and IRA accounts like they are pure gold and only for retirement. Only use them in emergencies and understand that you’ll pay a penalty, if you withdraw from a 401(k) before age 59 1/2. Every dollar you take out of a 401(k), costs you $10-$20 in lost future retirement income.

Forgot to plan for long-term care? This is one of the biggest threats to everyone’s nest egg. One year in an assisted living facility could add up to an average of $43,200, and the cost of a nursing home for one year could easily be double that. Long-term care insurance pays for adult day care, respite care, stays in special facilities for Alzheimer’s patients and hospice. LTC insurance also pays for in-home care, like skilled nursing, rehab therapy and personal care.

Getting aggressive in the market a few years before retirement. Three to five years before retirement is not the time to bet the house and hope your ship comes in. If you take a big hit, there’s no time to make up for twenty or thirty years of saving.

Expect a short and sweet life? You might be surprised at how long you live. However, you may also be surprised at the amount of money you need to live a long life. Create a retirement budget that anticipates a longer life span. You can always find a way to spend or give away money.

Make retirement saving a top priority. It’s not easy when you are trying to save for retirement, put kids through college and maybe remodel your kitchen. However, the new kitchen won’t be as much fun, if you are struggling to pay bills on a fixed income.

Neglecting to diversify investments. The right asset allocation can reduce the overall risk of a portfolio, especially as you get closer to retirement. Focusing on fixed income and value-oriented equities will supplement other income sources, like Social Security and a pension.

Being completely conservative. Some of your investments do need to be a little bit risky. You can’t be completely in cash or totally in CDs. There is still a need for growth, and that comes with some risk.

Supporting adult children. Putting retirement at risk because of children who aren’t fully independent creates problems for parents and children. The children need to understand that parent’s retirement accounts are not their personal ATMs.

Underestimating healthcare costs. A recent study found that the average healthy senior couple can expect to spend more than $275,000 on healthcare in retirement. Look into using a Health Savings Account (HSA) and have some emergency funds set aside.

Responding to volatile markets with emotions. A series of down days on the market, or bad news that pushes markets down for a few days or even a few months, is not the time to call a broker in a panic.

The impact of state income tax and high property tax rates. Most people have lost the ability to take itemized deductions or are limited by what they can deduct. The SALT limit is $10,000. A move to a lower tax state may be helpful in stretching retirement dollars.

Social Security planning strategies. Don’t just take your benefits as soon as you can. There are strategies that can maximize benefits for you and a surviving spouse.

Debt during retirement. Before retiring, pay off as much debt as you can. The more debt you have, the more vulnerable you are. That’s when an unexpected expense can derail retirement.

Have a realistic budget. Create a budget based on what your income will be during retirement. Do this before you stop working and try living on it. If you don’t have enough, keep working and rework your budget.

Procrastination on saving. Save early and save often. The longer you put off saving for retirement, the less time you have to catch up. Time can be your best friend, if you start early, or your worst enemy, if you wait too long.

Reference: Reader’s Digest (October 2019) “15 Retirement Mistakes That Will Ruin Your Retirement”

Special Needs Family Requires Special Planning

“As our children with disabilities grow older, and we ourselves grow older, the future can seem daunting. The future can be overwhelming.”

Taking steps to plan for the future, when loving parents will not be there to help their disabled child as they age, is a hard thing to confront. However, planning in advance for special needs family members is vital. An article titled “4 Tips for Estate Planning When Your Child Has a Disability” from Yahoo! Lifestyle offers good insights and information. An elder law attorney with a focus on special needs planning will be an invaluable resource.

Create a letter of intent. This is a letter of instruction that includes information family and friends will need, if you die or become incapacitated. It should list all the information someone would need to step into your life to care for your loved one. That includes information about medications, daily routines, strategies you use for calming and other daily living information that only you know. The goal is for someone to be able to step in and see how your life works with as little stress as possible and make the transition easier.

Meet with an attorney with experience in special needs planning. Most attorneys will meet you for a free consultation. Allow them to help you build a vision for what you want your loved one’s future to look like. They will know how to plan out the future and what documents will be needed.

Create a will. You’ll want to be the one deciding who should be the caregiver for your child, and who should be in charge of your money. Without a will, the estate goes to probate and a judge who does not know you or your child will make these decisions. Having a will ensures that assets are distributed as you intended, and that the care of your child is done by someone you select.

Create a special needs trust. Your attorney will help with this special type of trust, which allows you to distribute funds and property in a way that will not make your loved one lose their government benefits. Your special needs child is not permitted to have more than $2,000 in a bank account or they will become ineligible for Medicaid and Social Security.

Create an estate plan. The estate planning attorney will be able to help you use strategies to transfer assets, after you have passed.

Set up a power of attorney or guardianship. Do you need to take full guardianship of your special needs child, when they turn 18? Can he or she understand money and decisions? Will they ask for help? Supported decision-making is a viable alternative for some families, but you know your child best. If necessary, power of attorney for financial and for medical issues may work better. Talk to an attorney when your child turns 17, so that you can be prepared.

Establish an ABLE Account. An ABLE account ensures that benefits are not jeopardized. The account can hold money to ensure that your child never has more than the permitted number of assets.

Take this one step at a time, as you likely have done throughout your special needs child’s life. It may take a long time to put all of these steps in order, so start now.

Reference: Yahoo! Lifestyle (August 26, 2019) “4 Tips for Estate Planning When Your Child Has a Disability”

Giving With Warm Hands Gives a Happy Feeling

“Sometimes it can be wise (or just pleasurable) to give your assets away, while you're still alive.”

Traditionally, giving assets away while still living was done in an effort to minimize tax liability at death. However, with the federal tax exemption amount at $11.4 million and growing each year with inflation indexing, federal estate taxes apply to very few people, reports Kiplinger in the article “To Gift or Not to Gift.” The federal exemption is scheduled to fall to about $6 million per person in 2026, unless Congress makes changes to the law. However, even then, only about 0.2% of Americans will pay federal estate taxes.

Therefore, taking action to avoid federal estate taxes is not a top priority for most of us. However, you still need an estate plan to address asset distribution, state taxes and long-term care planning.

Twelve states and the District of Columbia currently have a state estate tax. Their exemptions are not as generous as the federal exemptions. Gifting can help reduce the state estate tax liability. For example, in Massachusetts, lifetime gifts are not subject to the Massachusetts estate tax. Making gifts reduces the value of the estate and lowers the state estate tax.

Before giving away assets to reduce state estate taxes, you’ll need to bear in mind the issue of unrealized capital gains and the step-up in basis. At death, the fair market value of most assets becomes the tax basis of those assets. Because many assets appreciate, the basis of assets is said to “step-up” to the fair market value, which can wipe away all potential capital gains taxes.

Giving can protect assets from having to be spent down to qualify for Medicaid to pay for nursing home care. If there is no long-term care insurance policy in place, there are two other options to pay for nursing home care. You can pay for it yourself, or, if you qualify, you can apply for federal Medicaid. However, to qualify, you’d have to have very little countable assets: $2,000 for a single individual in a nursing home and $128,000 for a married couple with a healthy spouse living at home. There is also a five- ear look back period, where Medicaid looks at five years of financial records to be sure you haven’t given away assets that could have been used to pay for nursing home care. Assets given away more than five years before an application is made are not countable. These gifts, including the family home, can be saved for loved ones.

What about the simple joy of giving? Many want to help loved ones, while they are alive, to witness what their loved ones can do with their generosity. A down payment on a first home, paying down a student loan, or helping with challenging expenses is a welcome way to help family members. Do give thought to your gift: does the use align with your intentions, could it be waylaid by a divorce or will creditors pounce on it?

There are requirements for gifts, in particular gifts in excess of $15,000 per year, to the same recipient usually require that a gift tax return be filed, even if there are no taxes due. As long as your total gifts during your life as less than $11.4 million, you will not owe a gift tax. However, you will need to file a gift tax return when you file your income tax return to report the use of the exemption during your lifetime.

Speak with your estate planning attorney before making significant gifts, to be sure that there are no unintended consequences for you or for the recipient.

Reference: Kiplinger (September 10, 2019) “To Gift or Not to Gift”Schedule

If You’re Going to Die, You Need an Estate Plan

“Estate planning sounds like you need to be of nobility and own country estates before it applies to you. However, estate planning only means that you are making a plan for when you pass away or are no longer able to make good decisions for yourself.”

If you switch the term “estate” for “stuff,” maybe you’ll have a better idea of why you need to have an estate plan. It’s so you can have a legally enforceable plan for your stuff. Estate planning is not just for millionaires and billionaires, says the Hawaii Reporter in the article “Wills and Trusts for the Rest of Us.” After all, it’s not just millionaires and billionaires who die.

There are questions that everyone needs to have an answer to:

• Who do I want to make medical and financial decisions for me, when I can no longer do so for myself?
• Who do I want to care for my minor children or my dependent elderly parents, when I am gone?
• Who do I want to have my earthly possessions, no matter how many or how few?

Even if all you have is a car and some furniture, you will want to decide who gets those and not leave it up to a stranger.

Having a will properly prepared by an estate planning attorney, is one of the most important things you can do as a parent. If you have dependents, whether they are children or adults, you need to have a plan in place for their care, in the event you pass away before they do. That plan is the most basic part of an estate plan: a will.

Without it, your dependents will become wards of the state. The state will decide what happens to your children or adult dependents.

Trusts are not just for rich kids. A revocable living trust is a document used as a secure and easy way to have your “stuff” move from you to your beneficiaries, without them having to be subject to probate. With a trust, you get to decide who gets what through the trust, and can even control when they receive an inheritance. You can make the distribution dependent upon completing an important task, like finishing college, or reaching a certain age.

A home or a car can also be placed in a trust, with an heir named as the beneficiary of that trust. You can continue to use all of the things that are in a trust, while you are living. However, whatever is placed in a trust will automatically transfer to the person you name as a beneficiary of the trust.

For medical and financial decisions, everyone over the age of 18 needs a Power of Attorney designating a person to make decisions for them, in case of incapacity. For medical decisions, you should have a healthcare Power of Attorney. You should also have a document stating your wishes, in the case of a critical illness or injury that clarifies what kind of end-of-life care you want. This is known as a Living Will in some states and an Advance Directive in others.

An estate planning attorney can help you create a plan for you want to happen in the case of incapacity and in the case of death. One is reasonably likely to occur and the other is a definite. Being prepared is the best thing you can do for yourself and your loved ones, no matter how much “stuff” you have.

Reference: Hawaii Reporter (September 28, 2019) “Wills and Trusts for the Rest of Us.”

Have Your Will Done? That’s Not An Estate Plan

“Every adult should have a will in order to determine property distribution after death. However, a will is limited in what it can do. Too often, a will cannot accomplish what you need or even expect it to do.”

A last will and testament is an important part of an estate plan, and every adult should have one. However, there is only so much that a will can do, according to the article “Estate planning involves more than a will” from The News-Enterprise.

First, let’s look at what a will does. During your lifetime, you have the right to transfer property. If you have a Power of Attorney, or POA, it gives someone you name the authority to transfer your property or manage your affairs, while you are alive. In most states, this document expires upon your death.

When you die, a will is used to transfer your property, according to your wishes. If you do not have a will, the court must determine who receives the property, as determined by your state’s law. However, only certain property passes through a will.

Individually owned property that does not have a designated beneficiary must be transferred though the process of probate. This includes real property, like house or a land, if there is no right of survivorship provision within the deed. The deed to the property determines the type of ownership each person has.

Couples who purchase property after they are married, usually own the property with the right of survivorship. This means that the surviving owner continues to own the property without it going through probate.

However, when deeds do not have this provision, each owner owns only a portion of the property. When one owner dies, the remaining owner’s portion must be passed through probate to the beneficiaries of the decedent.

Assets that do not have a designated beneficiary do not pass through probate, but are paid directly to the beneficiary. These are usually life insurance policies, retirement accounts, investment and/or bank accounts. Your will does not control these assets.

Beneficiaries through the will only receive whatever property is left over, after all reasonable expenses and debts are paid.

If you wish to ensure that beneficiaries receive assets over time, that can be done through a trust. The trust can be the beneficiary of a payable-on-death account. A revocable trust avoids property going through the probate process and can be established with your directions for distribution.

A will is a good start to an estate plan, but it is not the whole plan. Speak with an estate planning attorney about your situation and they will be able to create a plan that addresses distribution of your assets, as well as protect you from incapacity.

Reference: The News-Enterprise (September 30, 2019) “Estate planning involves more than a will”

Protect Your Pets After You’re Gone

“To ensure animals’ well-being, you should pick a caregiver and set up paperwork, funding.”

Currently, 67% of American households own at least one pet, and many people now consider long-term planning for them just as important as they would for two-legged family members, says The Atlanta Journal Constitution in the article “When you’re gone, what happens to your pets?”

If you think about it, our animal companions are completely vulnerable. They can’t take care of themselves. If something happens to their owners, it is possible that they could be taken to a shelter and euthanized. If you don’t want to be kept up at night worrying about this, a pet trust should be part of your conversation with an estate planning attorney.

Pets are viewed as valued members of the family in many homes. They provide companionship, and there have been studies showing that their presence helps to reduce stress. They often sleep in the same bed as their owners and go on vacations with their human family.

A 2018 Realtor.com survey found that 79% of millennials who purchased a home, said that they would pass on a home, no matter how perfect, if it did not meet the needs of their pets.

How can you protect your pets?

Understand that pets are considered property and have no legal rights. It’s entirely up to their owners to plan for their care. Some questions to consider:

• What’s the difference between a pet trust and a will?
• Do pet trust laws vary by state?
• Is a trust independent from a will?
• What happens to any funds left over, when the pet dies?
• Can you tap 401(k) or other retirement funds to care for a pet?

To begin, look at the life expectancy of each pet and factor the average vet bill, food bill and any additional money in case of an emergency. The ASPCA says that the annual cost to care for a dog is between $737 to $1,404. Caring for a cat averages about $800. Of course, caring for cats or dogs depends upon the age, breed, weight and whether the animal has any medical needs. Some pets can live a very long time, like horses, and certain birds can live more than seventy years.

Next, identify caregivers who will commit to caring for your pets. You should then talk with your estate planning attorney. If you rely on an informal plan, your pet may be out of luck, if something happens to the caregivers, or if they have a change of heart.

A pet trust allows you to leave money to a loved one or friend to care for the pet in a trust that is legally binding. That means the money must be used for the pet’s care. It can be very specific, including how often the pet should go to the vet and what its standard of living should be. The executor or lawyer could go to court to enforce the contract.

Typically, the trustee holds property “in trust” for the benefit of the pet. Payments to a designated caregiver are made on a regular basis. The trust, depending upon the state in which it is established, continues for the life of the pet or 21 years, whichever comes first. Some states allow the pet trusts to continue beyond 21 years.

Speak with your estate planning attorney about protecting your pet. You’ll feel better knowing that you’ve put a plan into place for your beloved furry friends.

Reference: The Atlanta Journal Constitution (September 24, 2019) “When you’re gone, what happens to your pets?”