Klitzman Law Group, PLLC

Retirement Savings Account Changes and Financial Decision Making

Keeping track of all the changes concerning retirement savings accounts and estate planning laws is not an easy task. However, there are some things you’ll want to know as 2024 moves forward. According to a recent article from The Wall Street Journal, “Changes in Retirement Savings Rules to Know Before Year’s End,” not knowing could impact retirement finances. Some of these changes include:

The End of RMDs from Roth 401(k) Plans. You use after-tax dollars to add to a Roth 401(k) plan. This is how contributions have always worked for Roth IRAs. Required Minimum Distributions (RMDs) had to be taken from Roth 401(k) plans. However, in 2024, this is no longer the case. If you meet other qualifications, you can take as much or as little as you like from your Roth 401(k), just as you do with a Roth IRA.

401(k) Catch-Up Contributions for High Wage Earners Must Go into Roth Accounts. Starting in 2026, if you are participating in a 401(k) plan, are age 50 and older, and if your annual income exceeds $145,000, you’ll have to make your catch-up contributions on a Roth basis. The income benchmark is indexed to inflation; your spouse’s income does not impact this change. This provision also does not affect Roth IRAs.

More Potential Tax-Deferred Growth for Certain Spousal Beneficiaries. Starting this year, an older spouse beneficiary of an IRA owned by a younger spouse who dies is treated as if they were the same age as the decedent spouse. RMDs based on the beneficiary's age don’t have to be taken until the deceased spouse is 73. While the benefits will depend on the younger spouse's age, this gives the surviving spouse more years for the account to grow tax-free.

A related change: the beneficiary may use the IRS uniform lifetime table to determine the amount of the RMD, which is a change from the single-life expectancy table. This can result in smaller RMDs, allowing for more tax-deferred growth. The RMD will rise to 75 years old in 2033.

Penalties for Missed RMDs are Reduced. The penalty for missed RMDs was reduced from 50% to 25% in 2023. If it’s corrected in a timely manner, two years from the end of the year for which the RMD should have been taken – it can be cut even lower, possibly as low as 10%.

These and other changes to retirement accounts may indicate a need for adjustments to your estate plan. With high estate and gift tax exemptions from the Tax Cuts and Jobs Act of 2017 possibly ending, now is a good time to speak with your estate planning attorney and learn if your estate plan is ready for the changes ahead.

Reference: The Wall Street Journal (July 31, 2024) “Changes in Retirement Savings Rules to Know Before Year’s End”

Estate Planning for Digital Assets

Whether you know it or not, you have a “digital footprint,” defined as the trail of data you create when using the internet, including photos, opinions, videos and financial and tax records. Just as we need an estate plan for traditional assets, a recent article from Think Advisor, “4 Ways to Help Clients With Digital Assets,” urges us to have a plan for digital assets. This makes life far easier for loved ones after we pass, protects the estate and limits identity theft.

The first step is to take inventory of your digital assets. This includes everything from assets owned by your business to your personal life. Online content, graphics, audio and videos are just the start. These four categories may be helpful:

Personal assets: Photos, videos, emails, contact lists, medical records, blogs, e-books, e-gaming assets, information on frequent flier miles, loyalty programs, etc.

Social assets: Facebook, Linked In, Instagram, Pinterest, X (Twitter), What’s App, Telegram and any platform where you communicate and post with others.

Financial assets: Investment and retirement accounts, banks, credit cards, tax documents, Pay Pal, Apple Pay and cryptocurrency.

Business assets: Websites, domain names, customer information, vendor information, intellectual property.

A digital inventory should not be part of your will, as the will becomes a public document once it is filed with the court. However, it should be treated the same as wills, trusts and transfer-on-death documents: kept in a secure location.

Next, name a Digital Executor. This is not yet legally binding in all states. However, you’ll want to name a tech-savvy person who can manage digital assets. This needs to be someone comfortable with the digital world and who understands what you want to happen to your digital assets.

For the most part, email accounts with companies like Yahoo and Google are actually owned by the companies and only licensed to users. Whether you remember or not, when you created the account, you opted into a “Terms of Service Agreement” or TOSA and agreed to use the platform. However, you didn’t purchase the email account itself.

Some platforms allow you to name a legacy contact to take control of your digital accounts. However, you’ll have to name someone, and they’ll need to reach out to the company and provide documentation as requested.

This may sound like a lot of work. However, not addressing digital assets means your digital and traditional assets may be vulnerable to cybercrime, including identity theft, hacking and fraud. Unlike traditional assets with a hard-copy paper trail, your digital executor will not be able to locate and manage digital assets without this information.

Talk with your estate planning attorney about how digital assets are handled in your state and for their recommendations on preparing this part of your estate.

Reference: Think Advisor (Aug. 4, 2024) “4 Ways to Help Clients With Digital Assets”

Another Celebrity Estate Dispute: Tony Bennett

The velvety-smooth voice and charm of Tony Bennett will long be remembered by several generations, since it spanned nearly eight decades. Hopefully, the estate battle now underway, reported in a recent Kiplinger article, “What We Can learn from Tony Bennett’s Estate Dispute” won’t take as long.

In 1994, Tony Bennett created a trust, naming himself and his son Danny as co-trustees. The trust was partially funded. His wife, Susan, and children, Antonia, Danny Dae, and Johanna, were all listed as beneficiaries. Upon his death in 2023, Danny became the sole trustee.

In June 2024, Johanna and Antonia filed a lawsuit saying Danny didn’t account for all trust assets and sales or other transactions about the trust assets. They also said he received personal benefits from these transactions.

Danny was more than a trustee—he was also his father’s manager. Benedetto Arts, LLC was formed to hold certain properties and estates. Danny was named manager of the LLC, and all of the children and the family trust held membership interests.

According to Tony Bennett’s will, any tangible property not transferred to the trust was to be distributed to his children equally. This included property, pictures and assets bearing his likeness.

The lawsuit alleges that before Tony Bennett died but after he was diagnosed with Alzheimer’s, Danny sold items of his father’s memorabilia as well as his name and likeness. He received large commissions through RPM Productions, a separate company Danny owned. The lawsuit further alleges that Danny received loans of $1.2 million from his father.

Transparency among siblings is critical. Especially when large amounts of money are at stake, siblings need to be able to communicate with each other openly and honestly. Once litigation begins, it has a way of growing, leading to expenses and family discord.

Professional or corporate trustees should be considered with large estates. A professional, non-family member with no personal stake in the estate would have been a better option to manage the complex structures involved in the Bennett estate. Having one child serve as personal manager, trustee, LLC manager and also being a beneficiary made it next to impossible to avoid any conflict of interest.

As Tony Bennett’s competency decreased, the potential for conflicts of interest increased. Even if Tony Bennett was competent for some transactions, he may have been susceptible to coercion or undue influence.

Even if you’re not a world-class singer and entertainer, working with an experienced estate planning attorney and other impartial professional advisors is necessary to prevent litigation and family fractures.

Reference: Kiplinger (Aug. 2, 2024) “What We Can learn from Tony Bennett’s Estate Dispute”

Social Security Updates You’ll Want to Know

Navigating Social Security isn’t always easy, largely because things keep changing. Not being aware of the changes can put a dent in retirement finances, according to a recent article, “3 Social Security Changes Retirees Need to Know About in 2024,” from Nasdaq.com. Anyone receiving benefits in 2024 should be aware of these changes.

 

Monthly benefits are higher due to inflation. After a long period when inflation was seemingly gone, we’re now experiencing both inflation and shrinkflation (packages becoming smaller while prices increase). The Social Security Administration has a built-in tool to respond to inflation: the Cost of Living Adjustment, or COLA.

Every year, Social Security benefits are adjusted to account for inflation. The increase is based on the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W), a measure of inflation monitoring costs of necessities: food, housing, and transportation. The average of the CPI-W for July, August, and September are compared to the prior year’s average inflation to arrive at the rate. Estimates for 2025 aren’t released until October, but early estimates expect it to be 2.6%. In 2024, the COLA was 3.2%.

Adjustments in 2024 increased the amount you can earn if you take benefits early. Some of your benefits may be withheld if you take Social Security benefits before reaching Full Retirement Age (FRA). If you don’t reach FRA this year, the earnings limit is $22,320. Your monthly benefit will be reduced by $1.00 for every $2.00 earned over the limit. However, if you reach FRA this year, the earnings limit is $59,520, with benefits reduced by $1.00 for every $3.00 above the threshold.

Note that these benefits aren’t permanently lost. Once you hit FRA, the SSA recalculates your benefits and adds back the amount that had been withheld.

It’s become harder to reach Social Security’s maximum monthly benefit. The core formula is based on your top 35 earning years. To qualify for the maximum benefit, taxpayers need to do two things: delay benefits until they turn 70 and earn more than the wage base limit for the 35 years used in the calculations. In 2024, the wage-based limit will be $168,000, the highest income subject to Social Security taxes. After this much income has been earned, there are no Social Security taxes.

Wage base limits change often, so if you want to reach the maximum monthly benefit, keep track of these changes and your income.

Reference: Nasdaq.com (July 29, 2024) “3 Social Security Changes Retirees Need to Know About in 2024”

How Estate Planning Prepares for Unexpected Medical Events

Estate planning is more than the distribution of property after a person dies—in fact, a large part of an estate planning attorney’s practice concerns helping people prepare for unexpected medical issues. A recent article from Merrill Foto News, “Know Your Legal Rights: Advance Care Planning Paves The Way For Future Medical Decisions,” explains what steps should be taken.

Anyone over 18 should have certain advance care plan documents in place, although these documents become even more critical as one reaches their later years. People who have been admitted to the hospital for emergency care, treatment for illness, or surgery all need someone else to speak with medical personnel on their behalf.

Having an Advance Directive, which is also known as Health Care Power of Attorney in some states, is necessary for another person to be able to be involved with your medical care. The healthcare law has become very restrictive, and simply being a person’s spouse or child may not be enough to allow you to make critical decisions on their behalf.

It’s best to name two people as your health care power of attorney—a primary and a backup in case the primary is unable or unwilling to act. If you and your spouse are both in a car accident, for instance, you’ll need someone else to advocate for both of you.

Who to name as your agent depends upon your situation. If your adult children live nearby, one of them may be the best choice if they can be counted on to follow your wishes. If no family is nearby, naming a trusted friend may work, unless you and the friend are both elderly. What would happen if your friend predeceased you or was unable to come to the hospital in the middle of the night? Your estate planning attorney can discuss your situation and help you determine the best candidates.

While many fill-in-the-blank Health Care Power of Attorney documents are available, it’s best to have one prepared by an estate planning attorney to reflect your wishes.

Your feelings about artificial life support also may have changed. Before COVID, people often said they didn’t want to be put on a respirator. However, respirators now save lives. Your wishes to be kept alive in the presence of different kinds of medical evidence may have changed from ten years ago. What if your heart is still working and a brain scan shows evidence of mental activities? Progress in medicine has led to more complex questions and answers about patients’ prognoses; you want a healthcare power of attorney document to reflect your wishes, given advances in medicine today.

Your feelings about healthcare decisions may have changed over time, so healthcare directives and an estate plan should be updated similarly to reflect changes in your life and circumstances.

Reference: Merrill Foto News (July 25, 2024) “Know Your Legal Rights: Advance Care Planning Paves The Way For Future Medical Decisions”

Can Life Insurance Replace Gifting and Lower Estate Tax Thresholds?

The possibility of paying up to 40% in estate taxes has many people contacting their estate planning attorneys to figure out how to avoid losing much of their estate to taxes. According to a recent article titled “An Alternative to Gifting For Estate Planning Exemptions” from Financial Advisor, there are a number of strategies to use.

These include using Spousal Limited Access Trusts (SLATs) so couples can gift significant assets to each other and still have access to the assets during their lifetime. Another is by making gifts to heirs who would otherwise receive them after their family member passes. However, the choices aren’t always desirable.

Gifting large amounts like $14 million is a lot of money to gift during one’s lifetime. If the asset gifted is securities, capital gains taxes may need to be paid. Suppose a taxpayer makes a $10 million gift of securities in 2024. They have passed $3.5 million and saved $1.4 million in estate taxes. However, if the transferees’ income tax basis in the $10 million of gifted securities is $4 million, and if the combined net capital gains tax rate, plus net investment income tax and state income tax is on the $6 million in appreciation, the built-in capital gains tax on the gifted securities would be $1.4 million.

Every gift of securities or business interest carries a certain amount of capital gains tax liability to be considered. If the taxpayer holds the assets until they die, the heirs get a step-up in basis, which they won’t get with a gift.

It’s impossible to know whether or not these tax exemption thresholds will be extended, which is why many taxpayers are confused about what to do. If a large transfer is made, then the tax exemptions remain high. Has the taxpayer put themselves in an unworkable situation?

An alternative to consider is life insurance. If a couple can purchase life insurance, they can purchase a second-to-die life insurance policy owned inside an irrevocable life insurance trust. If the premium is covered under the “Crummey powers,” which allow the money to not count against the estate and gift tax exemption, the proceeds of the second-to-die life insurance policy will be income and estate tax-free.

Will the numbers work? To see if it is a good option, each couple or individual will need to do a careful analysis of the premium cost, the expected time they will pay policies and the impact of gifting.

While each circumstance is different, discuss this with your estate planning attorney. Giving up full access and control of assets may not be necessary to avoid the estate tax. Alternatives should be considered before making any significant estate planning moves.

Reference: Financial Advisor (July 24, 2024) “An Alternative to Gifting For Estate Planning Exemptions”

What Should You Do when a Hospitalized Sibling Is About to Receive an Inheritance?

A woman learns she has a half-brother with no heirs who left her and a sister with a $3 million estate to be divided equally. The sister is a paranoid schizophrenic with a long history of not taking medication and was recently hospitalized after an incident involving the police.

A thoughtful article from Market Watch examines the issues being faced by the well-sister: “’She’s a danger to herself’: Our late brother left us $3 million, but my sister is in hospital with schizophrenia. Should I take control of her finances?”

Since both sisters are residents of Florida and the estate is going through probate, they are advised to retain an experienced estate planning attorney who focuses on setting up trusts for people with disabilities. One option is to have a Special Needs Trust created to plan for the sister’s care in the short and long term.

If the schizophrenic sister agrees to give the well-sister Power of Attorney, the well-sister could manage her sister’s finances. In some states, there is a Psychiatric Power of Attorney, similar to an Advanced Healthcare Directive or Medical Power of Attorney. However, the sister can only permit these documents to be created and executed when she is of sound mind and can make these decisions.

A Durable Power of Attorney gives one person authority to make financial and medical decisions for another. These documents can only be executed when the person has legal capacity. This is another reason why everyone should have these documents as part of their estate plan: We never know when they may be needed.

Another option is to put the sister’s funds in a trust to distribute funds regularly, which could prevent her from burning through the money in a short time. This is especially important if others might take advantage of her when she is suffering an acute episode of schizophrenia.

A conservatorship or guardianship may be necessary if the sister continues being hospitalized and is unwilling to grant her sister Power of Attorney. This is difficult when mental illness is the reason for incapacity, requiring more witnesses and documentation of the individual’s incapacity.

As many as approximately one in five adults suffer from mental illness at some point in their lives. Schizophrenia is a complicated mental disorder with psychotic symptoms, including hallucinations, delusions, paranoia and thought disorders. The unpredictability of the disease makes it more challenging than other mental illnesses.

An experienced estate planning attorney who understands how to structure inheritances when an heir suffers from mental illness will be an essential ally in this situation.

Reference: Market Watch (July 29, 2024) “’She’s a danger to  herself’: Our late brother left us $3 million, but my sister is in hospital with schizophrenia. Should I take control of her finances?”

Seniors Cannot Be Careful Enough About Internet Scammers

The biggest threat to retirement accounts today isn’t a market downturn. It’s thieves who have become highly sophisticated in technology and human nature.

A recent article from The New York Times, “How One Man Lost $740,000 to Scammers Targeting This Retirement Savings,” tells how a 76-year-old retired attorney was duped into thinking he was helping an active government investigation when he was actually being scammed out of almost all of his retirement savings accounts. This man was one of many who were drawn into complex plots so intricate they could be used for crime novels.

Scammers are especially adept at using human vulnerabilities against their victims. Romance scams are more common. However, so are impersonators who purport to be law enforcement officials or technical support team members. They use basic psychological tactics to get victims to act, isolate them from friends or family who might be suspicious and present an opportunity to do good for others by helping in the so-called “investigation” or preying on our basic desire to connect and be liked by others.

In 2023, cybercrime theft was more than $12.5 billion, an increase of 22% from 2022 and more than three times the levels in 2019. These are just the crimes known to the FBI—countless others go unreported.

Seniors over 60 are targeted because they are seen as having savings worth pursuing. In 2023, seniors lost more than $3.4 billion to cybercrime.

For the retired attorney, it started when he had trouble logging into a 401(k) account. When he got in a few days later, the screen changed abruptly, and he was instructed to call the fraud department. There was a phone number on the screen. He was connected with his first scammer. Lesson one: If you’re having trouble logging into an account, close the window and find a phone number in a paper document or statement.

The man said he was a fraud investigator, and his money was vulnerable. The scammer built credibility by knowing the victim’s name and where all of his accounts were. This scammer connected him to another man, who claimed to be from the bank. A third man alleged to be from the IRS was on the phone. He provided his badge number to establish further credibility. They told their victim he had an opportunity to be part of their investigation. He was told not to disclose the investigation to anyone, including his three adult children.

A lengthy series of machinations began, with the victim giving the so-called investigators access to his accounts and transferring assets as the thieves kept up friendly banter about how the investigation was going. They told him one of their targets had been caught by Interpol and another was being tracked in Singapore.

The thieves guided him through many transactions, including moving money from an IRA to another bank because the bank had declined to release a large amount of funds, being wary of fraud. The thieves responded by saying the advisor was on their watch list, making their victim suspect the one person who was trying to look out for him.

The man only learned he was a scam victim when a real detective found his name and address on a paper receipt for gold in a car. He was one of at least seven people pulled into a scheme based in India. Making matters worse, his withdrawals created a tax bill: $285,000 in federal and state income taxes, which he cannot pay.

Awareness and a healthy skepticism should be part of every senior’s survival skill set. If someone promises involvement in a scheme or requests money, contact a trusted adult child, your estate planning attorney, or even the local police department to be sure you are not being scammed.

Reference: The New York Times (July 29, 2024) “How One Man Lost $740,000 to Scammers Targeting This Retirement Savings”

Estate Planning for Digital Wealth

Traditional business owners selling their companies upon retirement usually turn to their estate planning attorneys, accountants and wealth advisors to structure the sale and manage assets. However, today’s “cryptocurrency whale,” a person who has amassed wealth in cryptocurrencies, non-fungible tokens (NFTs) and other digital assets, is more likely to take a different approach, which often doesn’t end well.

The relatively young person with great digital wealth usually has gained their wealth relatively quickly through some risk-taking in a new asset class.  However, they don’t have the experience or knowledge of protecting wealth over time. The skills needed to create crypto wealth differ significantly from those required to preserve and protect wealth.

A recent article from CPA Practice Advisor, “How to Protect Your Digital Assets From Estate Tax,” explains the unique challenges of preserving digital assets. The regulatory environment is new and still developing, as are tax reporting and tracking rules. The anonymity of digital wealth can make estate planning complicated, not to mention the challenges for asset transfer upon death or incapacity.

There are three key threats to cryptocurrency wealth: estate taxes at death, lawsuits from creditors and predators and loss of access by poor management.

Cryptocurrency holdings could be subject to a 40% estate tax without solid estate planning. If predictions for the future value of Bitcoin hold true, for instance, heirs could potentially owe tens of millions or more in federal estate taxes. This would require the assets to be sold to pay for the taxes, depriving heirs of any future growth of Bitcoin or other cryptocurrencies.

One strategy for 2024 is to use the current lifetime gift tax exemptions to transfer as much as $13.61 million of assets expected to appreciate to a Nevada irrevocable third-party dynasty trust. Once the Bitcoin is in the trust, the value is removed from the taxable estate, and the asset won’t be taxable for hundreds of years. You’ll need to speak with an experienced estate planning attorney familiar with trusts to be sure this is created properly.

If you’re an active trader, it may make more sense to set up an LLC (Limited Liability Corporation) to hold the cryptocurrency. By gifting the LLC interest to an irrevocable trust, you may be able to avoid estate taxes on the appreciated value of the cryptocurrency. If your crypto investment exceeds the federal gift tax exemption, your estate planning attorney may advise you to sell the excess amount to the trust for a long-term promissory note. This will keep the note’s face value in your estate but not the appreciation, giving heirs significant tax savings.

Trusts protect traditional assets from creditors, and digital assets can be protected in a similar fashion. By using an LLC and an asset protection trust and placing your LLC interest in the correct trust, you can shield assets from unforeseen creditors and predators. Note that this needs to be done before litigation or creditor action occurs.

Protecting assets with estate planning may seem like an old-school task for people whose wealth has come from the newest asset class. However, it’s a wise move. Talk with an estate planning attorney about the right strategies to protect wealth.

Reference: CPA Practice Advisor (July 16, 2024) “How to Protect Your Digital Assets From Estate Tax”

Can You Prepare for the Unexpected in Life?

It often takes a dramatic event, like an accident or illness, to wake us up to the importance of planning for the future. A recent article, “Are you prepared for a life-changing event?” from the Chattanooga Times Free Press, begins with a letter from a reader who experienced a bad car accident. At age 55, he had no plan for long-term care and questioned what he needed to do to protect himself and his family.

Step one in planning to protect the family is to have term, universal, or whole life insurance. Depending upon your financial situation, you likely need personal life insurance in addition to what you receive through employment.

Long-term care is missing from many people’s plans. The best time to purchase a long-term care insurance policy is during your thirties or forties when you are likely in relatively good health. This is usually not the time that people are thinking about long term care, unfortunately. The younger you are, the less costly they will be. Ensure that any policy includes at-home care and care provided in a nursing or other skilled care facility.

You may end up purchasing a life/annuity insurance policy with a provision for long-term care coverage. Since there are fewer and fewer life insurance companies selling long-term care coverage, this may be your best option.

Planning for the future also means having an estate plan prepared by an experienced estate planning attorney. You’ll need a power of attorney for you and your spouse, so you can manage their personal affairs if they are too sick or injured to do so themselves. This is not automatically granted because you are married, so don’t overlook it. If no one is a POA and something happens, you may end up having your affairs managed by someone the court has appointed instead of a loved one.

You’ll also need to have a medical power of attorney, sometimes called a health care power of attorney, so you and your spouse can act on each other’s behalf if you are incapacitated. Being someone’s married spouse used to be enough for this, but not in today’s highly regulated (and litigious) environment.

A living will is tough to contemplate. However, it is a blessing for those you love. This document is used to state your wishes if you should become incapacitated. Do you want to be kept alive by artificial means? In what situations would you want to be resuscitated? Your estate planning attorney can explain the different options to consider.

Your last will and testament is used to distribute property in the event of your death. These documents are state-specific, so you’ll want to work with an attorney in your jurisdiction. They can be combined with trusts to help minimize federal and state estate taxes and control how assets are distributed.

Speak with an experienced estate planning attorney to clarify your wishes and prepare you for the future, in the short and long term.

Reference: Chattanooga Times Free Press (July 6, 2024) “Are you prepared for a life-changing event?”