North Carolina Estate Planning Blog : North Carolina Estate Planning Lawyer & Attorney : Trust Counsel, PA : Trust Administration : Serving Chapel Hill, Durham, Raleigh, Pittsboro, Orange County, Chatham County

Recently, I heard a story about a family who used a reverse mortgage. The mother has Alzheimer’s but is in great physical health. The father was in good health and was caring for the mother. The son was recently out of work and decided it would be a good time to move back to help his father care for his mother. The parents recently qualified for Medicaid, but had a reverse mortgage line of credit to help in the event of emergencies. The house is worth $175,000.00 and they owe $35,000.00 on the reverse mortgage. The parents had intended to leave their estate, which consisted primarily of the house, to their son.

The father suffered a heart attack and passed away suddenly. The mother is physically “healthy as a horse,” as are many people who suffer from Alzheimer’s, and may have many years of life left. The son, however, may not be able to provide care for her for the rest of her life.

THE PROBLEM: If the mother has to go into a nursing home and is there for over a year, the reverse mortgage will be called. The mother and son, unable to repay it, will lose the house. The mortgage company will auction or sell the house and any money left over from the sale will go back to the mother, which will kick her off Medicaid. The parents’ lives of hard work to pay off their home and to have something to pass on to their loyal son may be lost in the blink of an eye.

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Effective January 1, 2010  North Carolina law required (1) that a Will prepared by an attorney contain the name of the attorney as the drafter; and (2) that an attorney who drafts the will of relative with a bequest or devise to the attorney must attach an affidavit stating that he or she is in compliance with the law that prohibits drafting such wills unless the testator is a relative.

These laws are repealed as of July 1, 2010.

As worded initially, it was not clear if failure to comply with the statutes invalidated the Will.  This has been clarified - the law now provides that failure to include the drafting attorney's name or the required affidavit does not invalidate the Will.

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Most of what I write about relates to death, disability and taxes, and planning for those things.  Pretty heavy stuff.  So I'm glad to share this video with you, which features a 72 year old woman giving a hilarious deadpan testimony to growing older.

Thanks to my colleague Jennifer Garner for bringing this to my attention.  Below is a picture unrelated to the video linked to above, but in keeping with the tone of this post.  Enjoy!

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Successful estate planning generally involves passing on your assets to your heirs at a low tax cost. To help achieve that goal, there are a few things to keep in mind about retirement accounts.

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This morning on the way to work I heard an interesting piece on National Public Radio about the use of remote video monitoring of elderly persons.  There are also companies that provide less invasive methods of monitoring, such as motion detectors.  While I was certainly familiar with medical alert services that call for help at the push of a button, the more sophisticated programs described in the story were new to me.

While some may be concerned about  loss of privacy, such monitoring services can help provide peace of mind for spouses and children of elderly or disabled persons at a fraction of the cost of a in- home caretaker.

The article on NPR's website that I linked to above provides links to some of the businesses that provide these services.

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I created a few of the these "10 Things" lists myself, and this list provides some basic information on what to think about before entering retirement. 

However, in Number 8, the article states that "it is helpful to speak with a qualified attorney or estate planner to determine how best to handle your estate." (Emphasis added.) This statement is misleading in that only an attorney can prepare an estate plan for someone.  Furthermore, it's not just helpful to speak with an attorney, but if you want to make sure that you have protected your family, preserved your assets, and maximized any tax savings, it is imperative.  Everyone should see any estate planning attorney, and way before one starts thinking about retirement.

A few weeks ago I had my 18 year old son, who just headed off to college, sign a Will, Durable Power of Attorney, Health Care Power of Attorney, Living Will and HIPAA Authorization. At his age, he may not care much about those documents, but I feel better knowing that if, for example, he is hospitalized and can't communicate, I will have the power to communicate with the doctors and make decisions for him.

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Three of four prominent IRA experts have either already utilized a Roth conversion or plan to do so, and the fourth says he plans to if the market gets even worse.

Click here to see what Ed Slott, Robert Keebler, Seymour Goldberg and Natalie Choate have to say about their personal Roth conversion decisions.

While I have attended programs by Slott, Keebler and Choate, I certainly don't have the same status in the tax world as do they (nor their wealth, I would venture to guess).  But for what it's worth, at age 49 I am leaning against doing a Roth conversion for two primary reasons:  1)  Even with the coming tax increases, I believe my tax rate during retirement will be lower that it is presently, and 2)  I don't want to spend my cash reserves paying the taxes that will be due as a result of the conversion.

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While there is still debate over whether Congress will increase the scheduled $1 million exemption and decrease the 55% rate when the estate tax returns in 2011, as the days and weeks pass it seems much less likely that the estate tax will be implemented retroactively for 2010.  See this article in Investment News, which also discusses upcoming changes in the the income tax.

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Probate and Estate Administration Matters Are Generally Handled in the State Courts – But Not Always, As One NC Executor Recently Found Out

Probate – the process of filing a deceased person’s will and administering the estate – is generally considered a matter exclusively for state courts. Federal courts are limited in the types of actions they can hear, and the “probate exception” generally excludes probate matters from the federal courts. The Supreme Court held in one case that the federal courts have no authority to “interfere with the probate proceedings or assume general jurisdiction of the probate or control of the property in the custody of the state court.” Markham v. Allen, 326 U.S. 490, 494 (1946). However, the probate exception does not necessarily exclude all probate-related matters from federal court, as one Executor of a North Carolina estate recently discovered.

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Wake Forest University's School of Law, known state-wide for its Elder Law Clinic program, offers valuable resources on its website, both North Carolina specific and otherwise.

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No, not little green men, but non-citizens.  This list, complete with links to the IRS website, is courtesy of Brian Dooley, CPA, MBT:

1.Tax Treaties

The U.S. tax liability of aliens is determined primarily by the provisions of the U.S. Internal Revenue Code. However, the United States has entered into certain agreements known as tax treaties with several foreign countries which oftentimes override or modify the provisions of the Internal Revenue Code.

2. Resident Aliens

A resident alien's income is generally subject to tax in the same manner as a U.S. citizen. If you are a resident alien, you must report all interest, dividends, wages, or other compensation for services, income from rental property or royalties, and other types of income on your U.S. tax return. You must report these amounts whether from sources within or outside the United States.

3. Nonresident Aliens

A nonresident alien usually is subject to U.S. income tax only on U.S. source income. Under limited circumstances, certain foreign source income is subject to U.S. tax.

4. Dual-Status Aliens

You are a dual status alien when you have been both a resident alien and a nonresident alien in the same tax year.

5. Source of Income

A nonresident alien (NRA) usually is subject to U.S. income tax only on U.S. source income.

6. Income Types

In general, all income of a nonresident alien is Fixed, Determinable, Annual, Periodical (FDAP) income. However, certain kinds of FDAP income are considered to be effectively connected with a U.S. trade or business. These two types of income are taxed in different ways.

7. Tax Withholding on Foreign Persons

Payments of income to foreign persons are subject to special withholding rules. In particular, foreign athletes and entertainers are subject to substantial withholding on their U.S. source gross income. This withholding can be reduced by entering into a Central Withholding Agreement with the Internal Revenue Service.

8. Taxpayer Identification Numbers (TIN)

Anyone (including aliens) who files a U.S. federal tax return must have a Taxpayer Identification Number (TIN). In addition, aliens who request tax treaty exemptions or other exemptions from withholding must also have a TIN. 

Note: Resident Aliens are also subject to U.S. Gift and Estate Tax laws, as are non-resident aliens with regard to U.S. real property.

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This post is by elder law attorney Kristin L. Burrows, who recently joined my firm.  Look for more entries from her in the future, focusing on elder law.

There are numerous rules governing who is eligible for Medicaid to help pay nursing home costs. Medicaid planning involves advising clients about what those rules are and applying the rules to their financial situation. The goal of Medicaid planning is to protect the client’s rights and maximize the assets that Medicaid allows them to keep or transfer.

In the overwhelming majority of cases, the people who are coming to see me for Medicaid planning are not wealthy, and are not trying to hide money. The people who come to see me are often the spouse or family member of an elderly person who needs to enter a nursing home. The family is overwhelmed by the circumstances. They are worried about how to pay for the huge nursing home bills and how to protect the spouse who is still living at home. They are devastated by the thought that everything their spouse or parent spent their life working for and saving will be depleted by their final health care costs. They are often planning for Medicaid eligibility in order to protect the spouse who will remain at home (the “community spouse”) from becoming impoverished, and to protect some resources to help the person entering the nursing home maintain the best possible quality of life in his or her last years.

The truth is, Medicaid planning is usually the last ditch effort. How many people really think about long-term care planning? Even if they have thought about it, how many people know how to plan for it? Who knows if they’ll need it? Who knows when they’ll need it? Who knows how long they’ll need it? Who knows what level of care they’ll need? Who knows how much it will cost by the time they need it?

Moreover, in situations where someone needs nursing home care, there are often many other issues going on simultaneously. In some cases, the person entering the nursing home has either reached the point or is about to reach the point that he can no longer make his own decisions. An elder law attorney can help you navigate all of these issues to understand your rights and options, and to develop a plan to tackle the hurdles ahead.

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Roth IRAs are a great tax saving vehicle. The reason: Investments held in a Roth IRA are allowed to build up federal-income-tax-free. Later on, you can take federal-income-tax-free withdrawals. Obviously, a zero tax rate is the best rate going.

In addition to being great tax saving tools for retirement, Roth IRAs also provide tremendous estate planning advantages - especially if you can get a large portion of your wealth into an account.

Unfortunately, getting lots of money into a Roth IRA is not so easy. It can take many years of annual contributions. However, there's also one very quick way - by converting an existing traditional IRA or SEP account into a Roth IRA. There are no limitations on the size or number of converted accounts. Naturally, under tax law, there is a price for allowing you to jump start your Roth IRA savings program with a conversion. Even so, it may be worth the price.

Roth Conversion Basics

A Roth conversion is treated as a taxable distribution from your traditional IRA. In other words, you're deemed to receive a taxable cash payout from your traditional IRA with the money going into the new Roth account. So the conversion triggers a current income tax bill. In most cases, however, this negative factor is outweighed by the following positive factors.

* You don't have to pay the 10 percent premature withdrawal penalty tax on the deemed distribution that results from the Roth conversion transaction. This is true even if you're under age 59 1/2 when the conversion takes place.

* Your conversion tax bill is significantly lower, thanks to the individual income tax rate cuts made in the 2003 tax law. Some people believe the tax rates we have today could be the lowest rates we'll see for the rest of our lives. No one knows, of course, but now could be a good time for a Roth conversion.

* The value of the traditional IRA (or IRAs) you want to convert may still be down because of poor investment performance in recent years. However, a lower account balance means a lower conversion tax bill, which is a good thing.

(See below for an important future change regarding an income limit for Roth conversions.)

Under prior law, an individual with modified adjusted gross income (MAGI) above $100,000 could not convert a traditional IRA into a Roth IRA. But the income limitation was eliminated beginning in 2010. For Roth conversions that occur in 2010 only, half of the taxable income triggered by the conversion generally can be reported in 2011 and the other half in 2012. For conversions in 2011 and beyond, all the income must be reported in the conversion year -- as under prior law.

There are only two requirements for tax-free withdrawals. You must:
1. Have a Roth account that's been open for more than five years.
2. Be age 59 1/2 or older.

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With only a couple of days until Congress takes its summer recess, it's likely that that nothing will happen with estate tax reform until September at the earliest.  Even though this article from Investment News states that "reversion to 55% rate and $1 million exemption [is] not seen as likely," many tax professionals feel differently.

Persons whose estates would be affected by the estate tax at a $1 million exemption should not wait to plan, given the 55% rate that will apply.  The potential cost to one's heirs is simply too great.

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When Trusts Meet Retirement Accounts, a recent article on WSJ.com, explains the benefits of using a trust to pass on IRAs and other retirement accounts to children.  Properly drafted trusts can provide protection against losing or depleting the funds due to mismanagement, creditors, and divorce.  What's more, since the accounts can then be "stretched" over the beneficiaries' lifetimes, the effect of tax-deferred compounding on the account values is simply astounding.

Due to the complexities in this area of the law, working with an attorney experienced in drafting such trusts and well-versed in applicable law is imperative.

I regularly recommend Standalone Retirement Plan Trusts to clients who have $200,000 or more in retirement savings and want to ensure that the funds will be protected after their deaths.

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