Posted on March 31, 2011 by Greg Herman-Giddens

Long-Term Care Planning: Myths vs. Realties

The following is a guest post by Robbi Weinman, CLTC:

Long-term care planning should play a key role in your overall financial, estate, and retirement planning strategy. Unfortunately, there are many myths associated with long-term care insurance. The goal of this article is to provide you with the facts you need to make an informed decision on the need for long-term care planning for yourself and your family.

Myth: It is difficult to qualify for benefits.

The reality is that it is relatively easy to qualify for benefits. The two benefit triggers are (1) you cannot perform two of the six activities of daily living (as a result of an accident or chronic disease) or (2) you have severe cognitive impairment. Approximately half of the long-term care claims are Alzheimer's, and Alzheimer's patients are being diagnosed much earlier (some in their fifties), as a result of more sophisticated diagnostic techniques. The other large claims are the result of cancer, cardiovascular disease, diabetes, osteoporosis, arthritis, Parkinson's, and similar chronic diseases. If you go on a disability claim and are using your disability policy, the chances are very good that you also qualify for long-term care services.

Myth: These are nursing home policies.

The reality is that most long-term care services are being given in the home. A long-term care policy covers home health care, assisted living facilities (which have medical floors and Alzheimer's units), nursing homes, and adult day care. A policy helps keep you out of a nursing home by providing options for you. You have control over where you will receive care and who will be providing the care for you. Most people want to receive care in the home. Home health care is an array of services that include licensed and certified home health aides, homemaker services, and skilled care (nurses, physical therapists, etc.).

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Posted on March 30, 2011 by Greg Herman-Giddens

Health Care Reform - How it Will Affect Our Taxes

 

Health care reform doesn’t come cheap. How do we pay for it? More and increased taxes, of course, both this year and in future years, along with certain credits for health insurance premium costs. This is an outline of the many tax law changes as a result of the new health care laws, organized by affected parties and implementation date:

Individuals:

·        Starting in 2011

o   Over-the-counter medications are no longer qualified expenses for Flexible Spending Accounts, Health Savings Accounts, or health reimbursement arrangements

o   20% penalty for nonqualified distributions from Health Savings Accounts, up from 10%

 

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Posted on March 29, 2011 by Greg Herman-Giddens

Planning Tips for Clients with Chronic Illness

Yesterday I attended a presentation by attorney Martin Shenkman, whose wife has multiple sclerosis - he regularly speaks on planning for those with chronic illness.  He offered the use of his materials to the attendees, and this is one of his memos:

1. Important. 120 million Americans are living with chronic illness. Don’t underestimate or ignore the tremendous impact on a large portion of your client base. Every legal document, plan, etc. has to be tailored to address chronic illness. Standard documents and planning will often not protect the person living with chronic illness.

2. Income Tax Issues.
a. Can the client claim a parent or other loved one confined to a nursing home as a dependent?
b. Are the costs the client is incurring for qualified long-term care, including nursing home care that is deductible as medical expenses? What planning can be done to maximize the deductions?
c. What affirmative steps can a client take to enhance the likelihood that certain expenditures will qualify as deductible medical expenses for tax purposes? How can the client corroborate that an otherwise personal expense is for medical care? What is the taxpayer’s motive or purpose for incurring the expense? Has a physician recommended the item or expense to treat a diagnosed medical condition? Has this been confirmed in writing? Can the taxpayer establish that the item would not have been bought but for the disease or illness? IRC Sec. 213(d); INFO 2009-0209.
d. Payroll taxes for in home aides can be a nuisance. Proposed regulations may permit home care service recipients to designate an agent to report, file, and pay all employment taxes, including FUTA. See Prop. Reg. 31.3504-1; REG-137036-08.
e. Standard deduction for taxpayers who are legally blind may be higher.
f. Gross Income may exclude certain disability-related payments such as Veterans Administration disability benefits, and Supplemental Security income.
g. Impairment related work expenses of an employee who has a physical or mental disability limiting their employment, may be deductible business expenses in connection with their workplace. The expenses must be necessary for the taxpayer to work.
h. A credit for the elderly or disabled may be available. This credit is generally available to certain disabled taxpayers who are younger than 65 and are retired on permanent and total disability.
i. Earned income tax credit EITC is available to disabled taxpayers as well as to the parents of a child with a disability.
j. Dependent care credit taxpayers who pay someone to come to their home and care for their dependent or spouse may be entitled to claim this credit. There is no age limit if the taxpayer’s spouse or dependent is unable to care for themselves.

3. Insurance. Evaluate existing life insurance policies. Identify and evaluate all planning opportunities which may include: accelerated death benefit options; borrowing against cash value to fund needed expenditures; viatical settlements; possible sale into the secondary market versus cash surrender value (CSV).

4. Disability. Identify and address all aspects of disability planning which is often more diverse and complex then clients realize. Advise the client as to the tax status of insurance paid for personally versus insurance paid for from a business. For private disability insurance does the client have a residual versus total disability? Have the calculations been made correctly? There are often a myriad of assumptions in the calculations that integrate policy terms, accounting concepts and tax definitions. These will often require an analysis of earnings and business expenses realized by the client over a base period that may not conform with annual tax returns. Check insurance company calculations. The definitions of “disability” and “income”, etc. will often be different under disability income replacement policies, business overhead interruption insurance, disability buyout insurance and employment or shareholder agreements. Review all contractual arrangements that apply to the client and endeavor to develop a consistent, yet accurate set of calculations for each.

5. Expenditures. Clients with chronic illnesses or with loved ones with chronic illnesses may face unique budgeting issues that other clients don’t. Standard rules of thumb, which many investment advisers use, might not be reasonable. Assist the client in preparing reasonable projections that might address their unique situation. Then review with the client and the client’s attorney the revocable living trusts (clients facing significant health issues, especially progressive illnesses should have trusts) and durable powers of attorney to address these expenses to assure that the fiduciaries have both the authority and guidance to address them. This will also require that the fiduciaries have authority to access medical records that may be necessary to evaluate the appropriateness of certain bills. HIPAA is the affectionate acronym for the Health Insurance
Portability and Accountability Act of 1996 (Pub. L. No. 104-191, 110
Stat. 1936 (1966)); 45 C.F.R. Sec. 164 (2002).

Special expenses may include:
a. Shortened work expectancy.
b. Costly improvements to make their home accessible.
c. Costs of having an independent Social Worker periodically meet with the client in his or her home and interview them and issuing a report. This can be invaluable in assuring proper care.
d. Using an institutional trustee and paying the fees involved.
e. Paying for experimental medical treatments which insurance won’t cover.
f. Paying for desired accommodations and living arrangements.

6. Settlement Suit. Income taxation of settlements is important to address pro-actively, preferably prior to settlement. Suits against an employer or partners for
discrimination, damages, back wages, are common and the amounts must be allocated to each tax category as the tax impact can be significant. Legal fees may be deductibility and the AMT trap that would otherwise eliminate a deduction avoided. IRC Sec. 62(a)(20) may permit deduction against adjusted gross income (AGI).

7. Investment Planning. Tailor an investment plan in light of the client’s specific circumstances, not generalizations or assumptions. Each chronic illness differs from other chronic illnesses. Each client’s experience is unique to that client. Client’s can have varying experiences over time. Risk profile and time horizon is not the same as for “other” clients. Risk may be affected by fear, medical costs, or need to retire early. The time horizon can vary – new drug therapies can change the course of the disease.

8. Client References. Refer clients to IRS Publication 3966, Living and Working with Disabilities, and IRS Publication 907, Tax Highlights for Persons with Disabilities.

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Posted on March 27, 2011 by Greg Herman-Giddens

Missed Your IRA Rollver Deadline? All May Not be Lost

The IRS is often accused of being heartless, but it does show some compassion to taxpayers who cannot complete an IRA rollover within the deadline because of extenuating circumstances.

The General Rules

Normally, you can roll over funds from one IRA to another tax-free as long as you complete the rollover within 60 days. (However, tax is automatically withheld unless the funds are directly transferred from one trustee to another.) The IRS has the discretion to waive the 60-day requirement if its imposition would

Factors Considered by the IRS

 
When considering whether or not to waive the 60-day requirement, the IRS considers all the relevant facts and circumstances, including:

  • Errors made by financial institutions.
  • An inability to complete the rollover due to death, disability, hospitalization, incarceration, restrictions imposed by a foreign country and postal errors.
  • How the funds were used. For example, if a payment was made by check, was the check cashed?
  • The passage of time since the distribution.

 The IRS "will issue a ruling waiving the 60-day rollover requirement in cases where the failure to waive such requirement would be against equity or good conscience, including casualty, disaster or other events beyond the reasonable control of the taxpayer." (IRS Revenue Procedure 2003-16)
go against equity or good conscience. If you inherit an IRA from your spouse, you can choose to roll over the funds into your own IRA, as long as you meet the 60-day deadline.

What if the deadline is missed? Any taxable amount that is not rolled over must be included as income in the year received. If the taxpayer is under age 59 1/2 at the time of the distribution, any taxable portion not rolled over may be subject to a 10 percent additional tax on early distributions.

In a series of private letter rulings, the IRS has granted taxpayers relief from tax bills and penalties.

For example, one taxpayer from Maine was unable to complete a rollover transaction on time because a major snowstorm made it impossible to get to the bank. The IRS granted a hardship waiver because bad weather was beyond her control. (IRS PLR 200406054)

In another case, a 68-year-old taxpayer who was diagnosed with progressive Alzheimer's disease made a series of withdrawals from his IRA to purchase a house -- even though he had other funds available. Based on a medical evaluation requested by his daughter, it was determined that the taxpayer was incapable of understanding the tax consequences of making IRA withdrawals. The IRS waived the 60-day rollover requirement. (IRS PLR 200401025)

Reprieves have also been given to taxpayers whose financial institutions made errors. And in another case, a widow who did not meet the rollover deadline was granted a waiver because she was still in mourning.

Facts of the case: The taxpayer's late husband owned an IRA. Before he turned age 70 1/2, he withdrew some of the funds. After his death, the taxpayer -- who was the sole beneficiary and under age 70 1/2 at the time -- cashed in the funds and deposited the money in an IRA in her own name. However, she did not complete the rollover within 60 days.

The taxpayer told the IRS she was in mourning over the death of her husband during the time frame for the rollover. She was also involved in arranging her husband's funeral and taking care of his estate. While handling the estate proceedings, she rolled over the IRA proceeds.

After reviewing the facts, the IRS accepted the widow's claim. Her failure to comply with the rule was due to the death of her husband and the aftermath. The IRS also noted that the waiver request was submitted shortly after the taxpayer discovered she had missed the deadline. (IRS PLR 200415012)

These are only a few of the examples of waivers granted by the IRS. If you think you -- or a loved one -- might qualify for a hardship waiver, consult with your attorney about requesting a ruling from the IRS.

Source:  TrustCounsel's March 22, 2011 eNewsletter by BizActions.

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Posted on March 22, 2011 by Greg Herman-Giddens

Decision Time is Here if You Did a Roth IRA Conversion in 2010

The rule that made higher-income folks ineligible for Roth IRA conversions expired at the end of 2009. That made 2010 a big year for conversions, because even billionaires could make the transactions. If you are among the many who took advantage last year, that's great, but there's more to the story. You still have some major decisions to make in 2011.

Here's what you need to know.

When to Report the Taxable Income from a 2010 Conversion?

You have the option of deferring the taxable income triggered by a 2010 Roth conversion and then spreading it evenly over 2011 and 2012 (50 percent in each year). Other things being equal, the deferral option is obviously a good idea.

You also have the alternative option of reporting 100 percent of the conversion income on your 2010 return instead of deferring it to 2011 and 2012.

Now that the Bush-era tax cuts have been extended through 2012, the deferral option is the best choice for most taxpayers. However, there are exceptions.

If you believe you'll pay a significantly lower tax rate on the conversion income by reporting it all in 2010, you should probably do that. For instance, say your 2010 income was depressed, but 2011 and 2012 are looking good. In this scenario, reporting all the conversion income on your 2010 return and paying a lower conversion tax bill might make it worthwhile to pay the bill sooner rather than later.

You make the choice to report 100 percent of the conversion income in 2010 by including a certain form with your 2010 Form 1040. This is how you also make the deferral choice -- by filing an IRS form with your tax return. Your tax adviser will take care of the details.  

Deciding Whether to Reverse an Ill-Fated 2010 Conversion

You have until the October 17, 2011 extended deadline for filing your 2010 Form 1040 to reverse an ill-fated 2010 Roth conversion by "recharacterizing" the converted account back to traditional IRA status. Note that the October 17, 2011 deadline applies whether you actually extend your 2010 Form 1040 or not.

Why would you want to reverse a conversion? Consider the following example.

Example: In 2010, you converted three traditional IRAs into three Roth accounts. We'll call them Roth IRA-1, Roth IRA-2, and Roth IRA-3.

In 2011, the value of Roth IRA-3 takes a big dive due to horrible performance by the investments chosen for that account. If you take no action, you'll owe income tax on Roth IRA-3 value that no longer exists. This is not good!

But you have until October 17, 2011 to reverse the Roth IRA-3 conversion by recharacterizing that account back to traditional IRA status. After the reversal, it's as if the Roth IRA-3 conversion never happened, so the related conversion tax bill simply goes away.

Deciding Whether to Extend Your 2010 Return

If you did a Roth conversion last year, there may be two good reasons to consider extending your 2010 Form 1040 to October 17, 2011.

Reason No. 1:  Extending gives you more time to decide if you should choose the deferral option (which would result in splitting the taxable income from your 2010 conversion evenly between 2011 and 2012) or choose the alternative option of reporting 100 percent of the conversion income on your 2010 return. As we explained earlier, the deferral option is probably the right choice in most cases, but it depends on how your 2010 tax rate compares to your expected rates for 2011 and 2012. By October, you'll have a better handle on those years than you do right now. So extending is a no-brainer. Do it by filing Form 4868 on or before April 18, 2011.

Reason No. 2:  Filing an extension makes it simpler to handle the reversal of a 2010 conversion, if a reversal becomes advisable. If you extend your 2010 Form 1040, you report a reversal by simply showing no income from the now-reversed conversion on your return. That would be easy. But if you decide on a reversal after shipping off your return, you'll have to file an amended return (using Form 1040X) to delete the conversion income. That is still possible but not as easy.

The Bottom Line

The book is still open on your 2010 Roth conversion deal, because you must make important decisions in 2011. First and foremost, you may want to extend your 2010 return to give yourself extra time to make those decisions. Even if you've never extended before, doing it this time around might be a good idea. Consult with your tax adviser if you have questions about your situation.

Source:  TrustCounsel's March 22, 2011 eNewsletter (BizActions).

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Posted on March 14, 2011 by Greg Herman-Giddens

10 Estate Planning DONT's

From a presentation I gave last week for Duke University's OLLI program's course on retirement and wealth management, here are 10 things NOT to do in terms of estate planning:

  1. Jointly own large bank or brokerage accounts.
  2. Leave assets directly to a minor child or incapacitated person.
  3. Forget to fund your living trust.
  4. Name your estate as the beneficiary of your IRA or other retirement account.
  5. Forget to have your plan reviewed every few years.
  6. Forget to coordinate your beneficiary designations with your plan
  7. Lose your original documents (it happens more often than you would think).
  8. Rely on non-experts for advice.
  9. Underestimate the value of using an estate planning specialist.
  10. Use the ostrich approach to estate planning.  (This is the most common method of planning/lack thereof!)

The reasons for most of these is obvious, others maybe not so much.  The best thing you can do to learn more is to consult with an estate planning attorney.

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Posted on March 9, 2011 by Greg Herman-Giddens

Long-Term Care Planning for Your Senior Life

From guest author Raymond Lavine:

Many senior citizens freely admit that they fear growing older more than they fear death. The prospect of becoming increasingly frail and dependent in a society which worships strength and self-reliance, and of losing family and lifetime friends can understandably make the specter of old age a frightening one.

Does senior-care have to be a time of physical failing and emotional loss? Of course aging brings physical deterioration, and time brings the loss of loved ones, but senior-care can still bring growth and new awareness. Those who are emotionally, financially, and socially ready to take on the challenges of aging are the ones for whom senior care will actually bring happiness.

Baby-Boomers, and those who are following us, find that we and our families are in denial about the fact that we are growing older. This denial is counterproductive, and if you are in that situation, you have the right to confront your loved ones with the fact that you need to make plans for your later years.

There are many aspects of home care or senior living which will require input from your family; where you will live; who will manage you finances should you become unable to; and who will be responsible for seeing that you get proper medical care an transportation if you need it. If you are going to live with one of your children, clarify what you expect of the other children so that there is no resentment from the child with whom you live, who may feel overwhelmed.

The quality of your senior living will depend to a very great degree on the communicating you do with your family ahead of time. Making sure in advance that your housing, finances, medical, and social needs will be met will not only relieve you of a tremendous burden; it will bring you and your family closer together so that your years of senior care will be pleasant and enjoyable.

Senior planning also means working with your financial planners; wealth managers; attorneys; and accountants. Owning long-term care plans is helpful to provide money for long-term care needs but this and other insurance need to be coordinated with your over-all estate and financial planning.
You have goals during your working and family career and it is essential to plan your goals for your senior years. There are many talented and knowledgeable people who will assist you with planning so that fear and denial turn into positive and meaningful goals and objectives.

And let us not forget the elder advisors: attorneys; wealth managers; financial planners, accountants, mediation services, and fiduciary services; elder care workers; and transition specialists.
 

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Posted on March 7, 2011 by Greg Herman-Giddens

NC Estate Planning Blog Nominated as Top 25 Estate Blog

The North Carolina Estate Planning Blog has been nominated as a 2011 Top 25 Estate , Probate and Elder Law Blog by LexisNexis.  If you are a reader, please vote for our blog.  Registration is required, but it's free and easy.

From the LexisNexis Estate Practice & Elder Law Community:

To "talk up" or nominate your favorite Estate, Probate, and Elder Law Blog, you'll need to be a registered Community member and be logged in. If you haven't  registered previously, follow this link to create a new registration or use your sign in credentials from your favorite social media site. Registration is free! Once you are logged in, scroll all the way to the very bottom of this page. You should see a comment box similar to this one:

Add a comment in the box at the bottom of the page to vote or nominate your favorite blog, and that's it! If you are having problems registering, click here, or please contact us at lisa.mcmanus@lexisnexis.com.  I'm the Communities Manager, and I want to make sure that everyone gets to vote!

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Posted on March 4, 2011 by Greg Herman-Giddens

IRS Says Beware of Frivolous Tax Arguments

From IR-2011-23

WASHINGTON — The Internal Revenue Service today released the 2011 version of its discussion and rebuttal of many of the more common frivolous arguments made by individuals and groups that oppose compliance with federal tax laws.

Anyone who contemplates arguing on legal grounds against paying their fair share of taxes should first read the 84-page document, The Truth About Frivolous Tax Arguments.

The document explains many of the common frivolous arguments made in recent years and it describes the legal responses that refute these claims. It will help taxpayers avoid wasting their time and money with frivolous arguments and incurring penalties.

Congress in 2006 increased the amount of the penalty for frivolous tax returns from $500 to $5,000. The increased penalty amount applies when a person submits a tax return or other specified submission, and any portion of the submission is based on a position the IRS identifies as frivolous.

The 2011 version of the IRS document includes numerous recently decided cases that continue to demonstrate that frivolous positions have no legitimacy.

Frivolous arguments include contentions that taxpayers can refuse to pay income taxes on religious or moral grounds by invoking the First Amendment; that the only “employees” subject to federal income tax are employees of the federal government; and that only foreign-source income is taxable.

In addition, the document highlights cases involving injunctions against preparers and promoters of Form 1099-Original Issue Discount schemes, and the imposition of criminal and civil penalties on taxpayers who claimed they were not citizens of the United States for federal income tax purposes.

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Posted on March 4, 2011 by Kristin L. Burrows

Veterans Victory in the Supreme Court

David Henderson was a Korean War veteran. He was discharged from active duty in 1952 due to paranoid schizophrenia. In 1992, the VA gave him a 100% disability rating, and in 2001 (while living in North Carolina) he filed a claim for supplemental benefits to help with the cost of in-home care related to his severe mental illness. His claim for disability benefits was denied, and he was given 120 days to appeal to the United States Court of Appeals for Veterans Claims (“Veterans Court”). He missed the deadline by 15 days and lost his right to appeal.

Henderson argued he was late filing his appeal because he was bedridden due to his service-related disability. The Supreme Court reviewed the case to determine whether the Veterans Court is allowed to make exceptions and extend filing deadlines for disability-related and other equitable reasons. In a unanimous decision issued on March 1, the Supreme Court Justices held that Henderson should not have automatically lost his right to appeal, and that the Veterans Court can make exceptions to the deadline for equitable reasons.

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Posted on March 3, 2011 by Greg Herman-Giddens

Powers of Attorney "Die" Along With the Principal

General ("financial") Durable Powers of Attorney (DPOAs) are very useful documents that every competent adult should have.  DPOAs can be used to manage one's property and affairs in the event of incompetency, avoiding the need for a court proceeding to determine incompetency and appoint a guardian.  This can save thousands of dollars in attorneys and court fees, not to mention much time and trouble.

However, what many people do not realize is that DPOAs are no longer valid after the person who signed it (the principal) dies.  Thus a DPOA cannot be used for any purpose after the death of the principal, including signing checks or accessing a safe deposit box.  If the bank doesn't know that the principal has died, the agent under the DPOA may not be prevented from taking these actions, but doing so could result in civil or criminal liability.

So, if you are the agent under a DPOA, DO NOT take any action using the DPOA after the principal dies.  If you do, you may very well create a mess that you will have to pay a lawyer to clean up for you.  My firm is doing that right now for at least one client.

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Posted on March 1, 2011 by Greg Herman-Giddens

Reverse Mortgages - the Impact on Older Homeowners

From a recent AARP report: reverse mortgages offer older homeowners a way to tap home equity to meet financial needs in retirement. However, the collapse of the mortgage market in 2008–2009 has led to major changes that impact consumer choices. While consumers have more product choices, reverse mortgages are generally more expensive and more complicated—leading to more scrutiny from Congress and regulatory agencies charged with protecting consumers.

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