Author Archives: Robert Mondo

A 529 plan, otherwise known as a qualified tuition plan, is a tax-sheltered way of saving for education expenses. 529 plans are sponsored by states, state agencies, or educational institutions.

A contribution to a 529 plan is not federally income tax-deductible, though it may qualify for a state income tax deduction in some states. Assets in the plan may be invested in various ways, depending upon the particular plan. Income earned in the 529 plan is not taxed currently. In fact, it may never be taxed, depending upon how it is distributed.

Distributions from the 529 plan, if used for the beneficiary’s qualified education expenses, including tuition, books, and other education-related expenses for students at colleges, junior colleges, technical schools, and even at primary and secondary schools (up to $10,000 per year) are income tax-free.

If the distributions aren’t used for qualified education expenses, the earnings would be taxable and may even be subject to a 10% penalty.

Contributions to a 529 plan may qualify for the gift tax annual exclusion (currently $15,000 per year per person). In fact, an individual may utilize up to 5 years of annual exclusions up front. If the donor dies within 5 years, the value of the annual exclusions for the years into which the donor did not survive would be brought back into the donor’s taxable estate. However, any growth on the funds would be out of the donor’s taxable estate.

Typically, if a donor retains control over assets, those assets are included in the donor’s taxable estate. Uniquely, the donor of the 529 plan can keep control of the plan during their life as the owner of the plan and yet the assets in the plan are still removed from the taxable estate. The account owner can change the identity of the beneficiary. So, if you select a successor owner, they could direct the funds away from the beneficiary.

If you want to lock down the 529 plan to make sure your successor doesn’t redirect the funds for themselves or beneficiaries whom they prefer, you could use a trust to hold the 529 plan. However, if you do that, you would be limited to one annual exclusion at a time.

An added bonus of 529 plans is they may even be exempt in bankruptcy, as long as the funds were contributed at least two years before the donor’s bankruptcy filing, the 529 plan is established for the donor’s children, grandchildren, step-children, or step-grandchildren, and contributions don’t exceed the 529 plan’s maximum contribution limit per beneficiary (which can be in excess of $500,000).

Thus, uniquely, a donor can keep complete control over 529 plan contributions, they may be completed gifts for gift and estate tax purposes, and they may be protected in bankruptcy.

The ranking listed the following states:

10. Alabama

Alabama ranked poorly because of low life expectancy and high crime. Alabama does not have a state estate tax.

9. Michigan

Michigan ranked poorly due to economic factors, crime, and many other reasons.

8. (tie) New York

New York ranked poorly due to high income and property taxes and a high cost of living, as well as harsh winters. The fact that New York’s separate state estate tax is phasing out may help in future rankings.

7. (tie) Maryland

Maryland, too, ranks poorly due to a high cost of living and higher than normal taxation. As with New York, the fact that Maryland’s separate state estate tax is phasing out may help in future rankings.

6. (tie) Georgia

Georgia ranks poorly in most categories besides weather. It should be noted that Georgia does not have a state estate tax.

5. Nevada

Nevada made this list due to a high crime rate and low life expectancies. The state has neither a state income tax nor a state estate tax.

4. Illinois

High property taxes contributed to Illinois’ appearance on this list. Illinois does have a separate state estate tax.

3. Tennessee

Tennessee ranks poorly due to high crime and low life expectancy. Tennessee has no tax on income except dividends and interest.

2. Louisiana

Louisiana ranks poorly due to high crime and low life expectancy.

1. Alaska

Alaska is ranked as the worst state for retirement due to harsh winters and its high cost of living. Alaska has no state income tax and no separate estate tax.

This listing in USA Today, based on a survey by MoneyRates, demonstrates that taxes are only a small part of the equation. Three of the five worst states for retirement have no state income tax, Alaska, Nevada, and Tennessee (except dividend and interest income tax). Many of the 10 worst states have no state estate tax. This list demonstrates that taxation is not the primary consideration for most people.

Last week, I wrote about the 10 Worst States for Retirement, based on a piece in USA Today. This week, let’s look at the 10 Best Places for Retirement in 2014, according to Bankrate.com.

The ranking lists the following states:

10. Virginia

Virginia ranked well because it had relatively low taxes, cost of living, and crime and a moderate climate.

9. Iowa

Iowa ranked well because of exceptional health care and low costs.

8. Idaho

Idaho ranked well because of a low cost of living, low crime, and plenty of sunshine.

7. Montana

Montana fared well because of abundant sunshine, good health care, low taxes, and low crime.

6. Nebraska

Nebraska ranked well because of low costs, low crime, good health care, and abundant sunshine.

5. Wyoming

Wyoming broke into the top five due to the lowest taxes in the country (according to Tax Foundation and considering taxes at all levels), low crime, and lots of sunshine.

4. North Dakota

North Dakota made the number four spot due to low cost of living, low crime, low taxes, good health care, and making the top of Gallup-Healthways’ Well-Being Index (which is a comprehensive measure of happiness).

3. Utah

Utah ranked well in every measure, including the Well-Being Index.

2. Colorado

Colorado took the penultimate spot with low costs, low crime, good health care, low taxes, and good performance on the Well-Being Index.

1. South Dakota

The top spot went to South Dakota which did exceptionally well in almost every category, including good health care, good performance on the Well-Being Index, extremely low taxes, low cost of living, and low crime.

The Bankrate.com listing, like the listing in USA Today, demonstrates that taxes are only part of the equation. Surprisingly, colder climates seem to predominate and the southern tier of states, from California to Florida, did not make the list at all.

Although estate planning may not be the top priority on your daily to-do list, it’s something that should be addressed before it’s too late. Completing the process ensures your wishes are fulfilled and your family is taken care of upon your death. It also keeps you covered if you’re still alive but become disabled or incapacitated. Here are four documents you will need.

1.  Trust

The last thing you want to do is leave it up to the courts to determine who receives your assets. Accordingly, it’s critical that you have a Trust in order to specify who gets what and other details. You don’t want to create strife between two or more family members because of a lack of clarification. That’s why it’s usually best to tell individuals ahead of time of what will be passed on to them. You should also choose a successor trustee to be in charge of paying taxes, managing assets and distributing them to beneficiaries.

2.  Durable Power of Attorney

In the event that you’re unable to make your own decisions while still living, you will want a person who you trust to make your decisions for you. You will give this individual the authority to act on your behalf to cover financial and legal transactions. Because this person will have a lot of power in their hands, it’s important to think carefully before choosing a durable power of attorney. This person should not only have your best interest in mind but should be financially responsible and capable of effectively managing money. Having a backup in place is a good idea in case something happens to your initial power of attorney.

3.  Medical Power of Attorney

This is a legal document that gives another person the ability to make your medical decisions for you if you’re unable to do so. They will act as your medical power of attorney and will essentially have your life in their hands. Consequently, making your choice isn’t something to take lightly. The person you choose should want only the best for your health and well being. They should also be able to remain calm during a stressful situation. Subsequently, objectivity is a good characteristic to look for.

4.  Living Will

Drafting a living will isn’t always a pleasant thing to do, but is nonetheless an important part of estate planning. In this document, you will specify what you want for end of life care and ensure that you remain relatively comfortable. For instance, if you develop a terminal illness that’s incurable, you could dictate what type of treatment you receive, if any. You could also determine whether or not you want artificial respiration to keep you alive. Having a talk with family and loved ones about your living will and medical power of attorney should make it easier in case of a difficult situation in the future.

Due to the emotional nature of estate planning, it’s sometimes put off. Even though death and medical issues aren’t something that we like to think about, much less put at the forefront of our minds, it’s better to take care of legalities in advance to make the process easier later on.

“Where’s That Advance Directive?” In the New York Times recently, Paula Span interviewed a hospital social worker about the unavailability of people’s advance directives at the hospital. She faces this problem at least once a week: patients—who have already signed advance directives—arrive at the hospital without them.

This social worker paints a picture of the fallout from not having the documents in a timely manner: delay of medical treatment, a near-miss in having the wrong person make health care decisions for the patient, and more. Frustrated, she concludes with the obvious: we waste our hard work making these decisions and having the difficult conversations with our loved ones if the documents aren’t there when it counts.

Taking up where Ms. Span left off, here are six of the most common myths people rely on when they assume that their advance directives will be available at the hospital—and why they are mistaken.

1. “My family has a copy and will remember to bring it to the hospital.” Well, it’s unlikely. In an emergency, the last thing on your loved one’s mind is your paperwork. In a time of crisis, your most capable loved ones will remain calm and focus their energy on you. Others may simply panic. An estate planning attorney admitted to me that, in the midst of his father’s heart attack, he didn’t think to get his dad’s advance directive before they left the house. “If I can’t remember to do this,” he observed, “how could I possibly expect my clients to remember?”
2. “If I forget it, my family can just go home for it.” Maybe—but at potentially great cost. Your loved one may have to leave you alone in the hospital when you are at your most vulnerable. Andgoing home to get it can hold up your treatment. On the flip side, in cases of serious trauma, there may not be enough time to get it. Emergency medicine physicians talk about the “golden hour,” essentially the first 60 minutes during which vital decisions may need to be made about your care. You could run the risk of your wishes not being honored if they are not known right away.
3. “My family knows where I keep it and will be able to find it.” Aside from the very neatest among us, does this one need a lot of debunking?
4. “My hospital has it already.” Irrelevant. This may be surprising, but don’t expect your hospital to look for your advance directive just because you gave it to them previously. (It would take too much time for them to go dig it out of your old chart from a prior hospital admission or episode.)  Even with an electronic medical record, an advance directive can be hard to find, because some of these systems don’t have a designated place for it. And some hospitals may have multiple electronic medical record systems that don’t talk to each other.
5.  “My advance directive is on a USB key (thumb drive) that I keep with me.” Useless. A hospital worth its salt in patient confidentiality and virus protection is not going to plug your thumb drive into its computer system.
6. “My doctor and my lawyer have copies if I need a backup.” Don’t rely on either of theseas yourprimary emergency backup. They can help you Monday–Friday during business hours, but are their offices open at 2 am? On Sunday? Doctors’ and lawyers’ offices are only open about 20% of the time in a whole week.

Most people aren’t familiar with the terms professionals use in discussing who administers their estate and affairs and what those responsibilities are. The following are terms that are often used in estate planning:

Beneficiary: The beneficiary receives something of value from the estate. For that reason, choosing the beneficiary to administer the estate or trust may present a conflict of interest. Typically, this conflict of interest is not of primary concern. If you wish to put a check on the beneficiary/trustee/executor, you may wish to add someone to serve as co-trustee or co-executor.

Trustee: A trustee can be either an individual or a corporation who manages property or assets held in trust. Trustees must make decisions regarding investments and distributions, while fulfilling the terms of the trust. When choosing a trustee, it’s important to choose someone who is able to follow instructions. They should be willing to seek help and able to choose those who have the legal or financial expertise which they may not have.

Durable Power of Attorney for Financial Affairs: Under this document, the “principal” can delegate to another person, called an “agent” or “attorney-in-fact,” the power to make decisions regarding assets, real estate, and other property titled in their own name, rather than the trust.

Medical Power of Attorney: Your “healthcare agent” will be making medical decisions for you when you are no longer able to do so. Choose someone you can talk openly and honestly with about your wishes beforehand and, most importantly, whom you trust to honor those wishes when the time comes.

Guardianship of Minor Children: A guardian makes decisions on behalf of an individual who is “legally incapacitated.” Someone who is not of legal age is a “minor” and is an example of someone who is legally incapacitated. While you can express whom you would like to act as guardian for a minor child, the ultimate decision lies in the hands of the court. The judge will make the determination guided by what is in the best interests of the child. Certainly, the judge will give your suggestion substantial weight.

With a little basic knowledge, most people are able to make informed decisions about who is best-suited to fill the various roles in their plan.

Bob

What’s the true value of an estate planning attorney? I’ve been reading about the latest lawsuit against LegalZoom. This one is a class action filed in California by a woman who is the niece and executor of the estate of LegalZoom client Anthony J. Ferrantino. Mr. Ferrantino, in the last months of his life, used LegalZoom to draw up a will and a living trust. It turns out that the trust couldn’t be funded because Mr. Ferrantino’s financial institutions would not accept the LegalZoom documents.

Naturally, upon finding this out, Mr. Ferrantino and his niece, Katherine Webster, asked LegalZoom for help – to no avail. After Mr. Ferrantino passed away with his trust still unfunded, it turned out that his will was also invalid because it had not been properly executed. Ms. Webster’s lawsuit is based on LegalZoom’s alleged deceptive business practices and unlicensed practice of law.

So, the trust documents were flawed. Giving LegalZoom the benefit of the doubt, you could make the valid argument that even attorneys have been known to make mistakes in the drafting of estate planning documents. It’s less likely that a lawyer would let a will go out the door improperly executed. In my mind, though, these aren’t the real issues.

The problem is that when consumers use “services” like LegalZoom, they’re on their own. Even after fatal flaws were found in the trust documents, LegalZoom did nothing to remedy the situation. Would this have happened if someone had been unable to fund a trust that I had created? Nope.

The value that I as an estate planning attorneys offer to clients is not just the documents… although well-drafted and effective documents are intrinsically valuable. Instead, the value I offer is my role as knowledgeable and trusted counselors… my relationship with my clients. When clients come to me for an estate plan, I’m not just filling in the blanks on their behalf. I’m listening intently to their stories and their questions, and often reading between the lines, to help them discern their true needs. And I’m there for my clients as issues emerge and their needs evolve.

So, in the end, I’m not competing in the same market as LegalZoom and other companies of its ilk. I’m not providing a simple commodity – and my clients and prospective clients deserve to know this.

So, call me to discuss your estate planning.

Bob

As an estate planning attorney, I know the many tax reasons to do estate planning. For example, doing annual exclusion gifts may reduce or eliminate state and federal estate taxes.

But, there are substantive reasons to plan, besides keeping the taxman at bay. It’s good to remember these reasons to need to plan, even if there are not concerns about taxes.

1.                 Incapacity.  This may be the most important reason to plan. Without planning, health care decisions may not default to the people you want. By doing a Health POA, or similar document, you can designate who will make decisions if you are unable to do so. Expressing your preference regarding end-of-life decisions typically is done in a separate document, which is also important. A Property POA would provide some incapacity planning for property, even in the absence of a trust.

2.                 Divvying Up Assets.  This is often the first thing that leaps to most people’s minds, so don’t leave this off our list of non-tax reasons. This is especially important if you are overriding the list of intestate heirs provided in the state legislation. For example, if a person wants to leave assets to their unmarried partner, friends, or a charity, this simply will not happen without an estate plan.

3.                 Avoiding Conflict.  A well-drafted estate plan can go a long way to prevent family discord, especially when the assets are being divvied up in a non-traditional manner.

4.                 Guardians.  A guardianship appointment is the proper place to nominate guardians to care for minors or incapacitated people (like parents or grandparents) close to them. While they may not care about taxes, they will likely want to protect those close to them.

5.                 Managers.  An estate plan is how you designate who is to control the assets left behind. This can be done with a continuing trust such as a testamentary trust. For example, they might leave assets in trust for a beneficiary until the beneficiary attains a certain age. Maybe they want their sister to manage the assets until the beneficiary reaches that age.

6.                 Probate.  In some states probate is a cumbersome process. It’s a very public process by its very nature. When people discover the disadvantages of the probate process, you will want to utilize a revocable trust during life to manage the assets. Many people know that an intervivos trust avoids probate at death. They may not know that a trust also assists with incapacity planning.

7.                 Coordination.  I always consider the coordination of the estate plan I draft for the client with beneficiary designations that have been or are suggested for certain assets. For example, if a client wants the assets to go 50% to A and 50% to B, simply stating that in the Trust is not sufficient. If beneficiary designations leave the assets in a different proportion or to someone else, those designations will control and the wishes expressed in the Trust will be thwarted. Most people are unaware of this fact.

While taxes are an important element of estate planning, especially for those subject to state or federal estate taxes, the most important reasons to plan are non-tax reasons.

Bob

Law Offices of Robert J. Mondo
P.O. Box 72668
Roselle, Illinois 60172
630-215-3676
Fax: 630-894-8860
E-mail: [email protected]
Website: www.lawrjm.com

To Preserve Governmental Benefits And Protect Assets…

A Supplemental Needs Trust (sometimes called a Special Needs Trust) is a specialized legal document designed to benefit an individual who has a disability. A Supplemental Needs Trust is most often a “stand alone” document, but it can form part of a Last Will and Testament. Supplemental Needs Trusts have been in use for many years, and were given an “official” legal status by the United States Congress in 1993.

A Supplemental Needs Trust enables a person under a physical or mental disability, or an individual with a chronic or acquired illness, to have, held in Trust for his or her benefit, an unlimited amount of assets.  In a properly-drafted Supplemental Needs Trust, those assets are not considered countable assets for purposes of qualification for certain governmental benefits.

 Such benefits may include Supplemental Security Income (SSI), Medicaid, vocational rehabilitation, subsidized housing, and other benefits based upon need. For purposes of a Supplemental Needs Trust, an individual is considered impoverished if his or her personal assets are less than $2,000.00.

A Supplemental Needs Trust provides for supplemental and extra care over and above that which the government provides.

Supplemental Needs Trusts had been used for years based upon case law. In 1993, Congress created an exception under the amendments to the Omnibus Budget and Reconciliation Act (OBRA-93) which specifically authorized the use of Supplemental Needs Trusts for the benefit of individuals who are under the age of 65 years and disabled according to Social Security standards. The Social Security Operations Manual authorizes the use of Supplemental Needs Trusts to hold non-countable assets.

Each Supplemental Needs Trust is its own “entity” with its own Federal Identification Number (Employer Identification Number) issued by the Internal Revenue Service. The Trust is not registered under either the Grantor’s or the Beneficiary’s Social Security Numbers.

According to Congress a Supplemental Needs Trust must be irrevocable. A properly-drafted Trust will include provisions for Trust termination or dissolution under certain circumstances, and will include explicit directions for amendment when necessary.

WHAT CAN A SUPPLEMENTAL NEEDS TRUST BE USED FOR?

To Ensure That Your Disabled Family Member Has Every Opportunity For A Fulfilled And Happy Life . . .

According to the law, a Supplemental Needs Trust can be used for “supplemental and extra care over and above what the government provides.” A properly-drafted Supplemental Needs Trust will work on a “sliding scale”; that is, in the impossible event that the government provides for 100% of the disabled beneficiary’s needs the Trust will provide 0%. If there are no governmental benefits available, the Trust can provide 100%. Most people fall somewhere along the scale, and the Trust supplements governmental coverage. If a beneficiary falls into a Medicare “doughnut hole” for example, it becomes the Trust’s job to cover the shortfall.

Although there are Medicaid rules that say that the Trust cannot be used for housing or food, these rules have to be interpreted carefully. For example, there is no restriction on purchasing an accessible home or making accessibility adaptations to an existing home and having the Trust own or pay for them.  Likewise, although foodstuffs are not strictly allowable under the rules, social events such as dinner parties  are; likewise, vacations and entertainments are permitted.

It is important to remember that a Supplemental Needs Trust is a living legal document that is meant to not only maintain benefits eligibility, but also to bring enjoyment and new, positive experiences to the beneficiary.  

 WHAT MUST A SUPPLEMENTAL NEEDS TRUST SAY?

Supplemental  Needs Trusts Need Special Language…

At a bare minimum, the Trust should state that it is intended to provide “supplemental and extra care” over and above that which the government provides.

The Trust must state that it is not intended to be a basic support Trust. It should not contain an estate tax provision called a “Crummey Clause.”

A properly drafted Supplemental Needs Trust should reference the Social Security Operations Manual and the relevant portions from within the Manual that authorize the creation of the Trust. It must contain the required language regarding payback to Medicaid.

The Trust should also have language explaining the exception to the Omnibus Budget and Reconciliation Act (OBRA-93) provisions which authorize the creation of the Trust, and a copy of the relevant provisions from the United States Code (USC).

FDIC insurance is confusing, especially when it comes to entities. Clients often ask about it, especially since the financial crisis of 2008. Here’s a quick breakdown of the current rules affecting common types of deposit accounts:

The Basics: The FDIC insures deposit accounts at most – but not all – banks and savings associations. Account holders can call 1-877-ASK-FDIC if they’re not sure whether their financial institution is covered. FDIC insurance covers checking accounts, savings accounts, money market accounts, CD’s and NOW accounts. It does not cover investments such as mutual funds, annuities, stocks, bonds, and life insurance policies.

Coverage Amounts: The default rule is that a depositor can have up to $250,000 in fully insured funds on deposit at a single insured bank. Different branches of one financial institution are considered the same bank for FDIC purposes. However, a depositor may qualify for more than the default amount of FDIC coverage if he owns accounts in different ownership categories at the same bank.

Single Ownership: An account owned by one person with no co-owners and no beneficiaries is insured for up to $250,000. If the same person owns multiple accounts in the same manner at the same institution, the same $250,000 maximum applies.

Joint Ownership: An account with more than one owner and no beneficiaries is insured for up to $250,000 per owner.

Revocable Trusts: The FDIC recognizes two categories of revocable trust accounts. Informal trust accounts include payable on death (“POD”), in trust for, Totten trust, and testamentary trust accounts. Formal trust accounts are those established pursuant to living trust or family trust documents. Both categories of revocable trust accounts are subject to the same rules, and coverage depends not only on the number of account owners, but also on the number of trust beneficiaries.

For trust accounts with five or fewer beneficiaries, each owner’s share of the account is insured for up to $250,000 for each trust beneficiary – regardless of the beneficiary’s interest under the trust agreement.

For trust accounts with six or more beneficiaries, each owner’s share of the account is generally insured for the total of the beneficiaries’ actual interests in the trust account (not to exceed $250,000 per beneficiary) or $1.25 million, whichever is greater.

Irrevocable Trusts: For irrevocable trust funds, FDIC insurance is tied to the trust beneficiary rather than to the account owner. In general, the FDIC adds together a beneficiary’s shares of all the irrevocable trust funds on deposit by the same settlor at a single bank and insures the beneficiary’s portion of the deposited funds for up to $250,000. However, the exact extent of coverage depends heavily on the terms and conditions of the trust itself.

For a firsthand look at how deposit insurance rules work for different types of accounts, you can use the FDIC’s Electronic Deposit Insurance Estimator (EDIE) tool.

Call me with any questions,

Bob