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Serving Clients in Edmond, OK
and the Surrounding Area

Can I Avoid Costly Medicare Mistakes?

Legacy and estate planning for people near retirement in EdmondAlthough not everyone is required to enroll in Medicare at the age of eligibility, many people must do so or risk lifelong late-enrollment penalties.  Many may ask can I avoid costly medicare mistakes?

CNBC’s article entitled “If you’re still working when you turn 65, be sure to avoid costly mistakes with Medicare” says the biggest mistake is to believe that you don’t need Medicare and to miss enrolling in it when the time comes.

Approximately 10 million workers are in the 65-and-older group, or 17.9% of that age group, according to the Bureau of Labor Statistics. The general rule for Medicare enrollment is that unless you satisfy an exception, you are allowed a seven-month enrollment window that begins three months prior to your 65th birthday month and ends three months after it.

One exception? If you have qualifying insurance with your employer.

Original, or basic, Medicare includes Part A (hospital coverage) and Part B (outpatient care coverage). Part A doesn’t have a premium, provided you have at least a 10-year work history of contributing to the program through payroll (or self-employment) taxes. Part B has a standard monthly premium of $148.50 for 2021, although higher-income beneficiaries pay more through monthly adjustments. About half (43%) of individuals opt to get their Parts A and B benefits delivered through an Advantage Plan (Part C), which typically includes prescription drugs (Part D). It may have a premium.

The rest go with basic Medicare and may pair it with a Medigap policy and a stand-alone Part D plan. Note that higher-income beneficiaries also pay more for drug coverage.

It’s crucial to understand that late-enrollment penalties last a lifetime. For Part B, the surcharge is 10% for each 12-month period you could’ve had it but didn’t sign up. For Part D, the penalty is 1% of the base premium ($33.06 in 2021) multiplied by the number of full, uncovered months you didn’t have Part D or creditable coverage.

The general rule for workers at companies with at least 20 employees is that you can delay your enrollment in Medicare, until you lose your group insurance (when you retire). Many people with large group health insurance wait with Part B but sign up for Part A because it’s free. It also doesn’t hurt you to have it. However, if you have a health savings account and a high-deductible health plan through your employer, you can’t make contributions after you enroll in Medicare, even if only in Part A.

If you remain with your current coverage and delay all or parts of Medicare, make certain that the plan is considered qualifying coverage for both Parts B and D. If you’re unclear if you need to enroll, ask your human resources department or your insurance carrier to confirm.

However, some 65-year-olds with younger spouses also might want to keep their group plan. Unlike your company’s option, spouses are required to qualify on their own for Medicare, regardless of your own eligibility.

If you have health insurance through a company with fewer than 20 employees, you should sign up for Medicare at 65, whether or not you stay on the employer plan. If you do choose to remain on it, Medicare is your primary insurance. However, it may be more cost-effective in that scenario to quit your employer coverage and purchase a Medigap and a Part D plan (or alternatively, an Advantage Plan,) rather than keeping the work plan as secondary insurance.

Workers at small companies frequently pay more in premiums than employees at larger firms. The average premium for single coverage through employer-sponsored health insurance is $7,470, research shows. However, employees contribute an average of $1,243 — or about 17% — with their company covering the remainder. At small firms, the employee’s share might also be far higher.

Reference: CNBC (July 22, 2021) “If you’re still working when you turn 65, be sure to avoid costly mistakes with Medicare”

 

Using Insurance in Estate Planning

It’s possible that life insurance may play a much bigger role in your estate planning than you might have thought, says a recent article in Kiplinger titled “Other Uses for Life Insurance You May Not Know About.”

If you own a life insurance policy, you’re in good company—just over 50% of Americans own a life insurance policy and more say they are interested in buying one. When the children have grown up and it feels like your retirement nest egg is big enough, you may feel like you don’t need the policy. However, don’t do anything fast—the policy may have far more utility than you think.

Tax benefits. The tax benefits of life insurance policies are even more valuable now than when you first made your purchase. Now that the SECURE Act has eliminated the Stretch IRA, most non-spouse beneficiaries must empty tax-deferred retirement accounts within ten years of the original owner’s death. Depending on how much is in the account and the beneficiary’s tax bracket, they could face an unexpected tax burden and quick demise to the benefits of the inherited account.

Life insurance proceeds are usually income tax free, making a life insurance policy an ideal way to transfer wealth to the next generation. For business owners, life insurance can be used to pay off business debt, fund a buy-sell agreement related to a business or an estate, or fund retirement plans.

What about funding Long-Term Care? Most Americans do not have long-term care insurance, which is potentially the most dangerous threat to their or their spouse’s retirement. The median annual cost for an assisted living facility is $51,600, and the median cost of a private room in a nursing home is more than $100,000. Long-term care insurance is not inexpensive, but long-term care is definitely expensive. Traditional LTC care insurance is not popular because of its cost, but long-term care is more costly. Some insurance companies offer life insurance with long-term care benefits. They can still provide a death benefit if the owner passes without having needed long-term care, but if the owner needs LTC, a certain amount of money or time in care is allotted.

Financial needs change over time, but the need to protect yourself and your loved ones as you age does not change. Speak with an estate planning attorney about your overall plan for the future.

Reference: Kiplinger (July 21, 2021) “Other Uses for Life Insurance You May Not Know About”

 

Do Singles Need Estate Planning?

Edmond legacy and estate planning for individuals in their peak earning years in EdmondPauls Valley Democrat’s recent article entitled “Even ‘singles’ need estate plans” tells us what might happen if you die intestate (without a last will and testament). In that case, your any assets without a surviving joint owner or designated beneficiary or titled in a revocable living trust may be required to pass through the probate process. As a result, they’ll be distributed by the court, according to the state’s intestate succession laws.  A question that arises is do singles need an estate plan?

Even if you don’t have children, you may have nephews or nieces, or even children of cousins or friends, to whom you’d like to leave some of your assets. However, if everything you own goes through probate, there’s no guarantee that these people will get what you wanted them to have. Therefore, if you want to leave something to family members or close friends, state this in your last will and testament.

However, you may also want to provide support to some charities. You can just name these charities in your will. However, there may be options that could provide you with additional benefits. One such possibility is a charitable remainder trust. With this trust, you’d transfer appreciated assets, such as stocks, mutual funds or other securities, into an irrevocable trust. Your named trustee could then sell the assets at full market value, avoiding the capital gains taxes you’d have to pay if you sold them yourself, outside a trust.

Moreover, if you itemize, you may be able to claim a charitable deduction on your taxes. With the proceeds, the trust can purchase income-producing assets and provide you with an income stream for the rest of your life. At your death, the remaining trust assets will go to the charities that you’ve named.

A single person also should have as part of his or her estate planning, a durable power of attorney and a health care proxy. A durable power of attorney allows you to designate an individual to manage your finances, if you become incapacitated. This is really important, if you don’t have a spouse to step in.

If you become incapacitated, your health care proxy – also known as a health care surrogate or medical power of attorney – allows you to name another person to legally make health care decisions for you, if you are unable to do so yourself.

Estate planning can be complex, so work with an experienced estate planning attorney.

Reference: Pauls Valley Democrat (June 24, 2021) “Even ‘singles’ need estate plans”

 

Advantages of a Testamentary Trust

fiduciary dutyOne reason to have a last will and testament is to protect minor children. A will offers a means of providing for a minor child through a testamentary trust.  There are advantages of a testamentary trust.  A testamentary trust is also a good tool for leaving an inheritance to someone who might not use their bequest wisely, says the recent article “What is a Testamentary Trust and How Do I Create One?” from wtop news.

Trusts are legal entities that hold assets, and money or other assets in the trust are managed according to the wishes of the person who created the trust, known as the grantor. A testamentary trust is created through the person’s will and becomes effective upon their death. Once the person dies, their assets are placed in the trust and are distributed according to the directions in the trust.  There are many advantages to a testamentary trust that can be explored.

A trust can also be created while a person is living, called a revocable trust or a living trust. Assets moved into the trust are distributed directly to heirs upon the person’s death and do not go through the probate process. However, they are administered without probate, as long as they are in effect. Living trusts are also managed outside of the court system, while testamentary trusts are administered through probate as long as they are in effect.

A testamentary trust is used to manage money for children. However, it can also protect assets in other situations. If you are concerned about an adult child getting divorced and don’t want their inheritance to be lost to a divorce, a trust is one way to keep their inheritance from being considered a marital asset.

The oversight by the court could be useful in some situations, but in others it becomes costly. Here’s an example. Let’s say a testamentary trust is created for an 8-year-old to hold assets until she turns 25. For seventeen years, any distribution of assets will have to take place through the court. Therefore, while it was less costly to set up than a living trust, the costs of court proceedings over the seventeen years could add up quickly and easily exceed the cost of setting up the living trust in the first place.

If someone involved in the estate is litigious and likely to contest a will or a trust, having the court involved on a regular basis may be an advantage.

Having an estate planning attorney create the trust protects the grantor and the beneficiary in several ways Trusts are governed by state law, and each state has different requirements. Trying to set up a trust with a generic document downloaded from the web could create an invalid trust. In that case, the trust may not be valid, and your wishes won’t be followed.

Once a testamentary trust is created, nothing happens until you die. At that point, the trust will be created, and assets moved into it, as stipulated in your last will and testament.

The trust can be changed or annulled while you are living. To do this, simply revise your will with your estate planning attorney. However, after you have passed, it’ll be extremely difficult for your executor to make changes and it will require court intervention.

Reference: wtop news (July 19, 2021) “What is a Testamentary Trust and How Do I Create One?”

 

Basics of a Successful Estate Plan

estate planning faqWhether you have a whole lot of money or a little, an estate plan is an essential. Understanding the basics of a successful estate plan is important.  An estate plan protects you and your loved ones, and can also minimize taxes, expenses, fees and the loss of your privacy. A solid estate plan is created by an experienced estate planning attorney who is familiar with the laws of your state, reports the recent article titled “Estate planning checklist: 3 key steps to making a successful plan” from Bankrate.com.

All good estate plans have three key elements: a will, power of attorney and an advance healthcare directive. Each serves a different purpose. Some estate plans also include trusts, but every situation is different. Your estate planning attorney will be able to create the right estate plan for you.

A Will. The will, also known as the last will and testament, is the foundation of all estate plans. It directs your assets to be distributed as you wish. Without an estate plan, the court decides who will receive your assets. That’s the biggest mistake you can make. It’s called dying intestate. Your heirs will be burdened with additional court costs, delays and the stress of not knowing what you might have wanted.

However, financial accounts and property aren’t the only valuable thing protected by your will. If you have a minor child or children, the will is used to name a guardian who will take care of them. It also names a conservator who will manage the child’s financial assets, until they are of legal age. The guardian and conservator may be the same person, or they might be two different people. If you opt to split the roles, be sure the two people work well together.

Power of Attorney. A power of attorney, or POA, is used to give another person legal authority to take care of financial and legal matters, while you are still living. If you are incapacitated, a POA gives someone else the ability to pay bills and manage your affairs. A medical POA gives another person the ability to make healthcare decisions on your behalf. The POA is completely customizable: you can use it to give someone else broad powers to do everything, or narrow powers so they are in charge of only one bank account, for instance. It is very important to have a detailed discussion with the person before you name them. It’s a big responsibility and you want to be certain they are comfortable carrying out all of the tasks.

The Advance Healthcare Directive. This document lays out in detail what you want to happen to you if you are not able to make decisions because of severe illness or injury. If you don’t want to be resuscitated after a heart attack, for instance, you would state that in your advance care directive. It includes a list of treatments you do and do not want. Your family will be able to use it as a guide to help them make difficult decisions regarding sustaining your life, managing pain and providing end-of-life care.

Trusts in Estate Planning. The three elements above form the base of an estate plan, but there are other tools used to achieve your goals. Depending on your circumstances, you will want to incorporate trusts, useful tools for transferring assets of all types. For example, when assets are placed in an irrevocable trust, they are no longer part of your estate, thereby minimizing your estate tax liability. Trusts are also used when parents wish to exert control over how and when money is distributed to children. If the parents should both die, a trust can prevent an entire inheritance coming into the hands of an 18-year-old who is legally old enough to inherit property, but likely not ready for the responsibility.

Trusts also transfer assets outside of the probate process, so they protect the family’s privacy. No one outside of the trustees know how much money is in the trust and how the money is being distributed. Trusts are not just for the very wealthy. They can help you protect assets from creditors, ex-spouses and litigious family members.

Reference: Bankrate.com (July 23, 2021) “Estate planning checklist: 3 key steps to making a successful plan”

 

What Is a Testamentary Trust?

estate planning faqTrusts are created to hold assets, and money in a trust is managed according to the instructions of the person who created it. A testamentary trust is a trust that’s created by a will after death, explains WTOP’s article entitled “What Is a Testamentary Trust and How Do I Create One?” Once the trust has been created, assets are placed into it and then distributed, as designated by its legal documentation.

There is also something called a revocable trust, which is a living trust created prior to a person’s death. A revocable trust is created outside of probate, which means that the heirs do not have to go through probate to receive assets from a living trust. Instead, a trustee can distribute funds directly to beneficiaries. Both testamentary trusts and living trusts are used for estate planning. However, a living trust allows for more flexibility and can have lower long-term costs. Living trusts are not only created outside probate but managed outside the court system as well. In contrast, testamentary trusts are administered through probate for as long as they are in effect.

A testamentary trust is frequently used to manage money for minor children, but it can protect assets in other situations too. The good thing is that there is a lot more court oversight. The bad part is court oversight is not cheap.

For example, a testamentary trust could be used to manage money for an 8-year-old beneficiary until age 25. But that means 17 years of probate. So, while testamentary trusts may be less expensive than living trusts to set up, they could cost more in the long run. These trusts are rare, and the one time a testamentary trust may have an advantage over a living trust is if someone involved in the estate is prone to taking legal action, in which case court management may be the better option.

You should ask an attorney to draft the documents. It should be an attorney who specializes in trusts and estates. Having an attorney draw up will and trust documents will make certain that they meet the state’s requirements and are written so that your assets are distributed according to your instructions.

When the creator of the trust dies, the testamentary trust will be created, and assets moved into it as stipulated in the deceased’s will. Distributions will then occur from the trust, as instructed in the trust documents.

Reference: WTOP (July 19, 2021) “What Is a Testamentary Trust and How Do I Create One?”

 

Does Estate Planning Vary by State

Estate planning laws vary greatly from state to state and understanding the difference could have a significant impact on whether your estate plan is valid. It is best to get this straight shortly after moving, says The National Law Review in the recent article “Updating Your Estate Plan: What Michigan Residents Need to Know When Moving to Florida.”

It’s not just people from Michigan who move to Florida who need to have their estate plans reviewed, if they are snowbirds or making a full-time move—it’s anyone who moves to another state, from any state. However, Florida’s popularity makes it a good example to use.

Florida restricts who is permitted to serve as a Personal Representatives under a will. The personal representative, also known as an executor, must be a descendent or ancestor of the decedent, a spouse, brother, sister, aunt, uncle, nephew, niece or descendant or ancestor of any such person or a Florida resident.

Florida doesn’t recognize “no contest” clauses in trusts or wills. It also does not recognize unwitnessed testamentary documents, which are handwritten documents even if they are in your own handwriting. Michigan may accept them, but Florida courts do not.

Florida also has a special set of laws, known as the Homestead laws, designed to protect a decedent’s surviving spouse and children. You may have had other plans for your Florida home, but they may not be passed to the people you have designated in your non-Florida will, if they don’t follow the Sunshine State’s guidelines.

Power of Attorney laws differ from state to state, and this can create huge headaches for families. In Michigan, the Durable Power of Attorney can be “springing,” that is, it is effective only upon incapacity. In Florida, once a Durable Power of Attorney is signed, it is effective. Florida may accept a DPA from another state, but Florida law will be applied to the agent’s actions, and restrictions will be based on Florida law, not that of another state.

As for estate planning documents concerning medical and financial decisions while you are living, these are also different. A living will names a person, known as a “Patient Advocate” in Michigan or a “Health Care Surrogate” in Florida, who is authorized to make decisions regarding end of life care, including providing, withholding, or withdrawing life-sustaining treatment. In Michigan, you need two doctors to certify a patient’s incapacity for non-life-or-death decisions. In Florida, only one doctor is needed.

Whether you are traveling north for a cooler summer or planning to leave a northern home before the winter arrives, meet with your estate planning attorney to understand how any and all of your estate planning documents will work—or not—when you are in another state.

Reference: The National Law Review (June 30, 2021) “Updating Your Estate Plan: What Michigan Residents Need to Know When Moving to Florida”

 

Revocable Trust or Irrevocable Trust?

estate planning faqThere are important differences between revocable and irrevocable trusts. One of the biggest differences is the amount of control you have over assets, as explained in the article “What to Consider When Deciding Between a Revocable and Irrevocable Trust” from Kiplinger. A revocable trust is often referred to as the Swiss Army knife of estate planning because it has so many different uses. The irrevocable trust is also a multi-use tool, only different.

Trusts are legal entities that own assets like real estate, investment accounts, cars, life insurance and high value personal belongings, like jewelry or art. Ownership of the asset is transferred to the trust, typically by changing the title of ownership. The trust documents also contain directions regarding what should happen to the asset when you die.

There are three key parties to any trust: the grantor, the person creating and depositing assets into the trust; the beneficiary, who will receive the trust assets and income; and the trustee, who is in charge of the trust, files tax returns as needed and distributes assets according to the terms of the trust. One person can hold different roles. The grantor could set up a trust and also be a trustee and even the beneficiary while living. The executor of a will can also be a trustee or a successor trustee.

If the trust is revocable, the grantor has the option of amending or revoking the trust at any time. A different trustee or beneficiary can be named, and the terms of the trust may be changed. Assets can also be taken back from a revocable trust. Pre-tax retirement funds, like a 401(k) cannot be placed inside a trust, since the transfer would require the trust to become the owner of these accounts. The IRS would consider that to be a taxable withdrawal.

There isn’t much difference between owning the assets yourself and a revocable trust. Assets still count as part of your estate and are not sheltered from estate taxes or creditors. However, you have complete control of the assets and the trust. So why have one? The transition of ownership if something happens to you is easier. If you become incapacitated, a successor trustee can take over management of trust assets. This may be easier than relying on a Power of Attorney form and some believe it offers more legal authority, allowing family members to manage assets and pay bills.

In addition, assets in a trust don’t go through probate, so the transfer of property after you die to heirs is easier. If you own homes in multiple states, heirs will receive their inheritance faster than if the homes must go through probate in multiple states. Any property in your revocable trust is not in your will, so ownership and transfer status remain private.

An irrevocable trust is harder to change, as befits its name. To change an irrevocable trust while you are living takes a little more effort but is not impossible. Consent of all parties involved, including the beneficiary and trustee, must be obtained. The benefits from the irrevocable trust make the effort worthwhile. By giving up control, assets in the irrevocable trust may not be part of your taxable estate. While today’s federal estate exemption is historically high right now, it’s expected to go much lower in the future.

Reference: Kiplinger (July 14, 2021) “What to Consider When Deciding Between a Revocable and Irrevocable Trust”

 

Financial Survival after Spouses Death

Edmond estate planning when divorcedFinancial survival after spouses death is hard sometimes.  The financial issues that arise following the death of a spouse range from the simple—figuring out how to access online bill payment for utilities—to the complex—understanding estate and inheritance taxes. The first year after the death of a spouse is a time when surviving spouses are often fragile and vulnerable. It’s not the time to make any major financial or life decisions, says the article “The Financial Effects of Losing a Spouse” from Yahoo! Finance.

Tax implications following the death of a spouse.  Financial after spouses death can also have tax implicationsA drop in household income often means the surviving spouse needs to withdraw money from retirement accounts. While taxes may be lowered because of the drop in income, withdrawals from IRAs and 401(k)s that are not Roth accounts are taxable. However, less income might mean that the surviving spouse’s income is low enough to qualify for certain tax deductions or credits that otherwise they would not be eligible for.

Surviving spouses eventually have a different filing status. As long as the surviving spouse has not remarried in the year of death of their spouse, they are permitted to file a federal joint tax return. This may be an option for two more years, if there is a dependent child. However, after that, taxes must be filed as a single taxpayer, which means tax rates are not as favorable as they are for a couple filing jointly. The standard deduction is also lowered for a single person.

If the spouse inherits a traditional IRA, the surviving spouse may elect to be designated as the account owner, roll funds into their own retirement account, or be treated as a beneficiary. Which option is chosen will impact both the required minimum distribution (RMD) and the surviving spouse’s taxable income. If the spouse decides to become the designated owner of the original account or rolls the account into their own IRA, they may take RMDs based on their own life expectancy. If they chose the beneficiary route, RMDs are based on the life expectancy of the deceased spouse. Most people opt to roll the IRA into their own IRA or transfer it into an account in their own name.

The surviving spouse receives a stepped-up basis in other inherited property. If the assets are held jointly between spouses, there’s a step up in one half of the basis. However, if the asset was owned solely by the deceased spouse, the step up is 100%. In community property states, the total fair market value of property, including the portion that belongs to the surviving spouse, becomes the basis for the entire property, if at least half of its value is included in the deceased spouse’s gross estate. Your estate planning attorney will help prepare for this beforehand, or help you navigate this issue after the death of a spouse.

It should be noted there is a special rule that helps surviving spouses who wish to sell their home. Up to $250,000 of gain from the sale of a principal residence is tax-free, if certain conditions are met. The exemption increases to $500,000 for married couples filing a joint return, but a surviving spouse who has not remarried may still claim the $500,000 exemption, if the home is sold within two years of the spouses’ passing.

There is an unlimited marital deduction in addition to the current $11.7 million estate tax exemption. If the deceased’s estate is not near that amount, the surviving spouse should file form 706 to elect portability of their deceased spouse’s unused exemption. This protects the surviving spouse if the exemption is lowered, which may happen in the near future. If you don’t file in a timely manner, you’ll lose this exemption, so don’t neglect this task.

Reference: Yahoo! Finance (July 16, 2021) “The Financial Effects of Losing a Spouse”

 

Calculating Social Security COLA

Legacy and estate planning for people near retirement in EdmondCalculating the Social Security COLA can be a mystery that many want to know.  In addition,  Kiplinger’s recent article entitled “What Is the Social Security COLA?” explains that for 2021, Social Security benefits increased by 1.3%— the smallest cost-of-living adjustment (COLA) since 2017.

However, seniors were anticipating no increase at all this year.

The estimated average monthly Social Security benefit payable in January 2021 increased from $1,523 in 2020 to $1,543. Yes, that is an entire $20!

The average monthly benefit for a couple when both are receiving benefits rose a whopping $33, from $2,563 to $2,596. The maximum Social Security benefit for a worker retiring at full retirement age (FRA) increased from $3,011 per month to $3,148, an additional $137.

It is important to know that more of workers’ income is subject to the Social Security tax in 2021. The Social Security tax will apply to the first $142,800 of earnings. That is up $5,100 from $137,700 in 2020.

COLAs are calculated using the Consumer Price Index (CPI) for Urban Wage Earners and Clerical Workers (similar to, but not exactly the same as, the urban dwellers’ consumer price index used in inflation reporting).

If prices do not increase or even fall, the COLA will be zero. That occurred in 2010 and 2011 because our economy struggled to recover from the Great Recession. This also happened in 2016, when nose-diving oil prices eliminated the opportunity for any COLA for that year.

Looking ahead at 2022, seniors could see a significant increase in their benefits. In May, the Kiplinger Letter forecast that the annual COLA for Social Security benefits for 2022 would be 4.5%—the largest increase since 2009, when benefits rose 5.8%.

A COLA adjustment is impacted by changes in the wage earners’ consumer price index. National average prices are used, and the Social Security Administration also calculates the percent change between average prices in the third quarter of the current year with the third quarter of the previous year.

The reason the fourth quarter is not used is because that number typically is not available from the U.S. Bureau of Labor Statistics until mid-January, and the Social Security Administration must make its adjustment on January 1st.

Reference: Kiplinger (June 28, 2021) “What Is the Social Security COLA?”

 

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