A Trust Just for Your Retirement Account. Is it right for you?

Unlike most of your assets, individual retirement accounts (IRAs) do not pass to your family through a will. Instead, upon your death, your IRA will pass directly to the people you named via your IRA beneficiary designation form.

Unless you take extra steps, the named beneficiary can do whatever he or she wants with the account’s funds once you’re gone. The beneficiary could cash out some or all of the IRA and spend it, invest the funds in other securities, or leave the money in the IRA for as long as possible.

So that’s why you might not want your heirs to receive your retirement savings all at once. One way to prevent this is to designate your IRA into a trust.

But you can’t just use any trust to hold an IRA. You’ll need to set up a special type of revocable trust specifically designed to act as the beneficiary of your IRA upon your death. Such a trust is referred to by different names—Standalone Retirement Trust, IRA Living Trust, IRA Inheritor’s Trust, IRA Stretch Trust—but for this article, we’re simply going to call it an IRA Trust.

IRA Trusts offer a number of valuable benefits to both you and your beneficiaries. If you have significant assets invested through one or more IRA accounts, you might want to consider the following advantages of adding an IRA Trust to your estate plan.

Protection from creditors, lawsuits, & divorce

While IRAs are typically protected from creditors while you’re alive, once you die and the funds pass to your beneficiaries, the IRA can lose its protected status when your beneficiary distributes the funds to him or herself. One way to counteract this is to leave your retirement assets through an IRA Trust, in which case your IRA funds will be shielded from creditors as long as they remain in the trust.

IRA Trusts are also useful if you’re in a second (or more) marriage and want your IRA assets to be used for the benefit of your surviving spouse while he or she is living, and then to distributed or be held for the benefit of your children from a prior marriage after your surviving spouse passes. This would ensure that your surviving spouse cannot divert retirement assets to a new spouse, to his or her children from a prior marriage, or lose them to a creditor before the funds ultimately get to your children.

Protection from the beneficiary’s own bad decisions

An IRA Trust can also help protect the beneficiary from his or her own poor money-management skills and spending habits. If the IRA passes to your beneficiary directly, there’s nothing stopping him or her from quickly blowing through the wealth you’ve worked your whole life to build.

When you create an IRA Trust, however, you can add restrictions to the trust’s terms that control when the money is distributed as well as how it is to be spent. For example, you might stipulate that the beneficiary can only access the funds at a certain age or upon the completion of college. Or you might stipulate that the assets can only be used for healthcare needs or a home purchase. With our support,  you can get as creative as you want with the trust’s terms.

Tax savings

One of the primary benefits of traditional IRAs is that they offer a period of tax-deferred growth, or tax-free growth in the case of a Roth IRA. Yet if the IRA passes directly to your beneficiary at your death and is immediately cashed out, the beneficiary can lose out on potentially massive tax savings.

Not only will the beneficiary have to pay taxes on the total amount of the IRA in the year it was withdrawn, but he or she will also lose the ability to “stretch out” the required minimum distributions (RMDs) over their life expectancy.

A properly drafted IRA Trust can ensure the IRA funds are not all withdrawn at once and the RMDs are stretched out over the beneficiary’s lifetime. Depending on the age of the beneficiary, this gives the IRA years—potentially even decades—of additional tax-deferred or tax-free growth.

Minors

If you want to name a minor child as the beneficiary of your IRA, they can’t inherit the account until they reach the age of majority. So without a trust, you’ll have to name a guardian or conservator to manage the IRA until the child comes of age.

When the beneficiary reaches the age of majority, he or she can withdraw all of the IRA funds at once—and as we’ve seen, this can have serious disadvantages. With an IRA Trust, however, you name a trustee to handle the IRA management until the child comes of age. At that point, the IRA Trust’s terms can stipulate how and when the funds are distributed. Or the terms can even ensure the funds are held for the lifetime of your beneficiary, to be invested by your beneficiary through the trust.

See if an IRA Trust is right for you.

While IRA Trusts can have major benefits, they’re not the best option for everyone. Laws regarding IRA Trusts vary widely from state to state, so in some places, they’ll be more effective than others. Plus, the value of IRA Trusts also varies greatly depending on your specific family situation, so not everyone will want to put these trusts in place.

Consult with us to find out if an IRA Trust is the most suitable option for passing on your retirement savings to benefit your family. But of course, if what you need is your foundational estate planning documents (like your Will, Power of Attorney, Health Care Directives), we can help you with that first!

Attorney Myrna Serrano Setty doesn’t just draft documents, she helps you make informed and empowered decisions about life and death, for yourself and the people you love. That’s why our firm offers a Planning Session. The Planning Session helps you get more financially organized than ever and helps you make the best choices for the people you love.  Start by calling us today to schedule a Planning Session and mention this article to learn how to get this $500 session for free.

Contact us at (813) 514-2946 or info@www.tampaestateplan.com.

 

Can An Adult Child Be Liable for a Parent’s Nursing Home Bill?

Although a nursing home cannot require a child to be personally liable for their parent’s nursing home bill, there are circumstances in which children can end up having to pay.

This is a major reason why it is important to read any admission agreements carefully before signing.

Federal regulations prevent a nursing home from requiring a third party to be personally liable as a condition of admission. However, children of nursing home residents often sign the nursing home admission agreement as the “responsible party.” This is a confusing term and it isn’t always clear from the contract what it means.

Typically, the responsible party is agreeing to do everything in his or her power to make sure that the resident pays the nursing home from the resident’s funds.

If the resident runs out of funds, the responsible party may be required to apply for Medicaid on the resident’s behalf. If the responsible party doesn’t follow through on applying for Medicaid or provide the state with all the information needed to determine Medicaid eligibility, the nursing home may sue the responsible party for breach of contract. In addition, if a responsible party misuses a resident’s funds instead of paying the resident’s bill, the nursing home may also sue the responsible party. In both these circumstances, the responsible party may end up having to pay the nursing home out of his or her own funds.

In a case in New York, a son signed an admission agreement for his mother as the responsible party. After the mother died, the nursing home sued the son for breach of contract, arguing that he failed to apply for Medicaid or use his mother’s money to pay the nursing home and that he fraudulently transferred her money to himself. The court ruled that the son could be liable for breach of contract even though the admission agreement did not require the son to use his own funds to pay the nursing home. (Jewish Home Lifecare v. Ast, N.Y. Sup. Ct., New York Cty., No. 161001/14, July 17,2015).

Although it is against the law to require a child to sign an admission agreement as the person who guarantees payment, it is important to read the contract carefully because some nursing homes still have language in their contracts that violates the regulations. If possible, consult with your attorney before signing an admission agreement.

Another way children may be liable for a nursing home bill is through filial responsibility laws.

These laws obligate adult children to provide necessities like food, clothing, housing, and medical attention for their indigent parents. Filial responsibility laws have been rarely enforced, but as it has become more difficult to qualify for Medicaid, states are more likely to use them. Pennsylvania is one state that has used filial responsibility laws aggressively.

We recommend that your Health Care Directives explicitly lay down a financial liability shield for your agents.

This one provision can save great grief and money.

Attorney Myrna Serrano Setty doesn’t just draft documents, she helps you make informed and empowered decisions about life and death, for yourself and the people you love. That’s why our firm offers a Planning Session. The Planning Session helps you get more financially organized than ever and helps you make the best choices for the people you love.  Start by calling us today to schedule a Planning Session. Mention this article to learn how to get this $500 session for free.

Call us at (813) 514-2946 or email us at info@www.tampaestateplan.com.

Fear of Losing Home to Medicaid Contributed to Elder Abuse Case

A California daughter and granddaughter’s fear of losing their home to Medicaid may have contributed to a severe case of elder abuse.

If they had consulted with an elder law attorney, they might have figured out a way to get their mother the care she needed and also protect their house.

Amanda Havens was sentenced to 17 years in prison for elder abuse after her grandmother, Dorothy Havens, was found neglected, with bedsores and open wounds, in the home they shared.  The grandmother died the day after being discovered by authorities.  Amanda’s mother, Kathryn Havens, who also lived with Dorothy, is awaiting trial for second-degree murder. According to an article in the Record Searchlight, a local publication, Amanda and Kathryn knew Dorothy needed full-time care, but they did not apply for Medicaid on her behalf due to a fear that Medicaid would “take” the house.

It is a common misconception that the state will immediately take a Medicaid recipient’s home.

Nursing home residents do not automatically have to sell their homes in order to qualify for Medicaid. In some states, the home will not be considered a countable asset for Medicaid eligibility purposes as long as the nursing home resident intends to return home. In other states, the nursing home resident must prove a likelihood of returning home. The state may place a lien on the home, which means that if the home is sold, the Medicaid recipient would have to pay back the state for the amount of the lien.

After a Medicaid recipient dies, the state may attempt to recover Medicaid payments from the recipient’s estate, which means the house would likely need to be sold.

But there are things Medicaid recipients and their families can do to protect the home.

A Medicaid applicant can transfer the house to the following individuals and still be eligible for Medicaid:

  • The applicant’s spouse
  • A child who is under age 21 or who is blind or disabled
  • Into a trust for the sole benefit of a disabled individual under age 65 (even if the trust is for the benefit of the Medicaid applicant, under certain circumstances)
  • A sibling who has lived in the home during the year preceding the applicant’s institutionalization and who already holds an equity interest in the home
  • A  “caretaker child” who is defined as a child of the applicant who lived in the house for at least two years prior to the applicant’s institutionalization and who during that period provided care that allowed the applicant to avoid a nursing home stay.

With advance planning, there are other ways to protect a house.

A life estate can let a Medicaid applicant continue to live in the home, but allows the property to pass outside of probate to the applicant’s beneficiaries. Certain trusts can also protect a house from estate recovery.

Don’t let a fear of Medicaid prevent you from getting your loved one the care they need. While the thought of losing a home is scary, there are things you can do to protect the house.

Attorney Myrna Serrano Setty doesn’t just draft documents, she helps you make informed and empowered decisions about life and death, for yourself and the people you love. That’s why our firm offers a Planning Session. The Planning Session helps you get more financially organized than ever and helps you make the best choices for the people you love.  Start by calling us today to schedule a Planning Session and mention this article to learn how to get this $500 session for free.

Call us at (813) 514-2946 or email us at info@www.tampaestateplan.com.

A Tax Break to Help Working Caregivers Pay for Day Care

Paying for day care is one of the biggest expenses faced by working adults with young children, a dependent parent, or a child with a disability. But there is a tax credit available to help working caregivers defray the costs of day care (for seniors it’s called “adult day care”).

In order to qualify for the tax credit, you must have a dependent who cannot be left alone and who has lived with you for more than half the year.

Qualifying dependents may be the following:

  • A child who is under age 13 when the care is provided
  • A spouse who is physically or mentally incapable of self-care
  • An individual who is physically or mentally incapable of self-care and either is your dependent or could have been your dependent except that his or her income is too high ($4,150 or more) or he or she files a joint return.

Even though you can no longer receive a deduction for claiming a parent (or child) as a dependent, you can still receive this tax credit if your parent (or other relative) qualifies as a dependent.

This means you must provide more than half of their support for the year. Support includes amounts spent to provide food, lodging, clothing, education, medical and dental care, recreation, transportation, and similar necessities. Even if you do not pay more than half your parent’s total support for the year, you may still be able to claim your parent as a dependent if you pay more than 10 percent of your parent’s support for the year, and, with others, collectively contribute to more than half of your parent’s support.

The total expenses you can use to calculate the credit is $3,000 for one child or dependent or up to $6,000 for two or more children or dependents. So if you spent $10,000 on care, you can only use $3,000 of it toward the credit. Once you know your work-related day care expenses, to calculate the credit, you need to multiply the expenses by a percentage of between 20 and 35, depending on your income. (A chart giving the percentage rates is in IRS Publication 503.)

For example, if you earn $15,000 or less and have the maximum $3,000 eligible for the credit, to figure out your credit you multiply $3,000 by 35 percent. If you earn $43,000 or more, you multiply $3,000 by 20 percent. (A tax credit is directly subtracted from the tax you owe, in contrast to a tax deduction, which decreases your taxable income.)

The care can be provided in or out of the home, by an individual or by a licensed care center, but the care provider cannot be a spouse, dependent, or the child’s parent. The main purpose of the care must be the dependent’s well-being and protection, and expenses for care should not include amounts you pay for food, lodging, clothing, education, and entertainment.

To get the credit, you must report the name, address, and either the care provider’s Social Security number or employer identification number on the tax return. To find out if you are eligible to claim the credit, click here.
For more information about the credit from the IRS, click here and here.

Are you worried about taking care of a loved one who has long-term care or special needs? We can help you put plans in place so that your family isn’t left with a mess if you become incapacitated or die.

This article is a service of attorney Myrna Serrano Setty. Myrna doesn’t just draft documents, she helps you make informed and empowered decisions about life and death, for yourself and the people you love. That’s why our firm offers a Planning Session. The Planning Session helps you get more financially organized than ever and helps you make the best choices for the people you love.  Start by calling us today to schedule a Planning Session. Mention this article to learn how to get this $500 session for free.