Obama’s Proposals Reminds Us To Reduce Our Legislative Risk Through Tax Diversification

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By Senior Attorney Dan Vu

We have all heard of the saying, “Don’t put all your eggs in one basket.” In the investment world, this means don’t put everything you have into one stock. Apple might be doing great now, but no advisor would want your entire portfolio to consist of Apple stock alone. The reason is obvious: one bad iPhone release and your retirement nest egg goes down the toilet. However, what is not as obvious, is that many retirees do have all of their eggs in one basket because they heavily rely on a single tax type of investment, the pre-tax retirement account. Too many have the overwhelming majority of their investments in pre-tax retirement accounts like IRA’s, 401K’s, and 457’s (Deferred Compensation). These accounts are very popular because they went in pre-tax and earn interest compounded and tax deferred. However, when you take money out is when you feel the pain. You will pay tax on the amount you withdraw at your ordinary income tax bracket rate. You also need be careful that the amount doesn’t push you into a higher tax bracket, increase taxes on your Social Security or increase your Medicare premium.

Now this is NOT advice to stop using pre-tax accounts altogether. They obviously have their tax advantages and they can be enormously beneficial. Instead, the advice is to take a second look at the allocation of your investments – but with a tax diversification lens. Tax diversification means balancing the use of traditional IRAs with Roths, which grow tax free on after tax money, along with investments taxed at the capital gains rate, and investments that are bought with after-tax money but are tax deferred like certain annuities. Tax diversification is important because it allows you to more effectively manage your legislative risk. That is, the risk we all have when politicians decide to change the rules on us mid-game. Pre-tax retirement accounts are more at risk of being attacked than other types of investments because of the sheer size of un-taxed dollars that could be available to our legislators.

According to Jeffrey Levine from The Slott Report, Americans currently hold well north of $20 trillion dollars in retirement accounts. “To put that into perspective, the National debt is ‘only’ about $18 trillion. The overwhelming majority of the $20+ trillion that’s held in retirement accounts is pre-tax money, meaning that it has yet to be taxed. To a broke government, it would be hard not to look at these accounts as a big, juicy steak.”

The President's proposalsProposals attacking the benefits of pre-tax retirement accounts have been passed around before. More recently, we were reminded of the importance of reducing your legislative risk through tax diversification, when President Obama announced his 2015 budget proposals. The President’s proposals attack some of the pillars that many have relied on when deciding to heavily invest in pre-tax retirement accounts.

The First Pillar – Ability to “Stretch the IRA”

The first and arguably the most important pillar, is the ability for heirs to “stretch” inherited retirement accounts. Currently, if your child inherits your IRA, he/she will not have to pay taxes on the entire amount in one lump sum. Rather, they can choose to take only the annually required minimum distribution based on the their own life expectancy. This is an incredible amount of tax savings for your child and it allows you to leave your retirement accounts to your child without an overwhelming tax burden. The President proposes the death of this stretch rule. With Obama’s proposal, a child inheriting a retirement account would have to withdraw the entire amount and pay taxes within 5 years! Imagine the tax hit on a single child inheriting $500,000 in retirement accounts. It would almost certainly propel that child into a higher tax bracket for the next 5 years and could cost them close to 45% of the inheritance in State and Federal income taxes.

The Second Pillar – Ability to take a NUA deduction

The President also proposed eliminating the NUA deduction (net unrealized appreciation). This deduction allows those with employer sponsored plans to pay the capital gains rate on company stock. Since the capital gains rate is lower than the tax payers ordinary income, the deduction can be a significant amount. The loss of the NUA deduction simply means higher taxes for all employer sponsored plans that also provide company stock.

The Third Pillar – Ability to Preserve a Roth IRA for Life

When you turn 70 ½ you must start drawing your RMD (required minimum distribution based on your life expectancy) on your pre-tax qualified accounts. Roths have never been subject to this requirement and it is the main reasons why tax payers have converted their IRAs to Roths. With this rule change, Roths would also be subject to the RMD rules like traditional IRAs. This ultimately means less tax savings and less tax-free inheritance being left to spouses and children. It is also another reminder not to rely on a single type of taxable investment -not even Roths.

Other proposed changes include placing a cap on contributions to retirement accounts and a cap on the deduction that certain tax payers would receive when making this contribution. All of these proposals amount to one idea: let’s attack the savings of retirees to help close the massive gap in our national budget. Certainly most of the proposals, if not all, will never see the light of day. The President and Congress are at odds on almost every subject, but all laws began as a simple proposal, sometimes decades before they became law. These proposals are a reminder to us, that tax diversification is key to reducing the risk of a change in the law.

So what if you are already heavily invested in pre-tax retirement accounts? Consider, converting them into other types of taxable investments. Of course consult with a competent tax and financial advisor. A blind conversion can cause unintended consequences, like increased tax on Social Security, higher Medicare premiums, and a spillover to a higher tax bracket.

Continuing Care Retirement Communities are the Least Profitable Businesses in the US

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By: Attorney Nathan Simpson

Continuing Care Retirement CommunitiesAccording to a new article in Forbes, Continuing Care Retirement Communites (CCRCs) and Assisted Living Facilities are the least profitable business in the US, turing on average a -1.0% profit margin. While this may simply seem like an interesting fact, it is a fact that could have potentially devastating effects on seniors.

Many CCRCs require seniors, as part of the contract to live there, to agree to spend down all of their money on the cost of the facility. In exchange, the CCRCs will agree to take care of the person, if possible, even after their funds have been exhausted. However, if the CCRC is unable to meet the care needs of the individual, or if the CCRC goes out of business, they are no longer under any obligation. Seniors could be spending their money on an agreement that the CCRC is unable to fulfill.

While many CCRCs are run as non-profits, this still raises grave concerns about their long term viability. If the CCRC is unable to fulfill their end of the bargain, the senior is forced to find a new facility. This can be difficult, as Assisted Living Facilities often refuse to take seniors who have already spent down their assets, and even some Nursing Homes often have long waiting periods for admission.

Important Information About Medicare Enrollment

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By: Attorney Nathan Simpson

Medicare enrollmentGetting Medicare enrollment correct is very important to avoid gaps in coverage. The Journal of Financial Planning has published a handy timeline which helps seniors plan for when to enroll. The Journal recommends enrolling in the three months prior to your 65th birthday to avoid any gaps in coverage. Waiting until after your 65th birthday could result in coverage delays of one month or more. Delaying too long can even result in penalties being assessed to your Part B Premium.

If you would like more information about planning for Medicaid, Medicare, or Social Security, please contact the Elder Law Attorneys at Cooper, Adel & Associates today.



What’s the Difference Between a Will and a Trust?

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By Chris Meyer

Many people think that Wills and Trusts are the same thing. Nothing could be further from the truth. While there are similarities, there are some very important differences. A Will is a very basic document that simply expresses the wishes of the deceased to the Probate Court. It does not avoid probate. The Executor who oversees the dispersement of the estate must follow a strict set of guidelines, keep meticulous records and report every action to the Probate Court. As such, these actions and the contents of the estate are a public record, in other words, they are NOT private. Any estate that is probated may be accessible to the public and with the convenience of the internet today, anyone may be able to access the details of a probated estate in many counties from the comfort of their own home!

The assets of a Trust on the other hand, completely avoid probate and public knowledge.The assets of a Trust on the other hand, completely avoid probate and public knowledge. A pre-appointed Trustee simply disperses the estate according to the wishes of the decedent which are outlined in the Trust. The Trustee does not have to report to the Probate Court and consequently the estate can remain private. In addition, the Trustee does not have to post bond. Other advantages of a Trust are that it can be customized for special situations, help maximize your estate tax deductions and even help you to preserve your assets from the Medicaid spenddown.

All estates are different, and there are many different types of Trusts that can be created in order to best suit your wishes after you pass away. If you would like to schedule a free one-hour consultation to see one of our attorneys, please contact our office at 1-800-798-5297. Our offices are located in Monroe, Sidney, Chillicothe, and Centerburg. Also, be sure to Like us on Facebook in order to keep up-to-date with our most recent blogs about a wide variety of estate planning and nursing home protection aspects.

Will you get an IRA penalty this year?

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The Tax Policy Center reports that 68% of IRA owners over age 70 1/2 have not yet taken their required minimum distributions this year.  If they don’t take these distributions by the end of the year, they will pay a 50% penalty on the distributions they should have taken!
Will two out of three IRA owners pay a huge tax penaltyTime keeps on slippin.’ Will two out of three IRA owners pay a huge tax penalty? New research from Fidelity offers a wake-up call to IRA holders over age 70 and a halfTime reports the findings: Among the 750,000 IRA holders required to take distributions and pay taxes by December 31, 68 percent have yet to take their full amount. More than half—56 percent—have so far taken nothing. If the money is not taken out, the IRS assesses a hefty penalty equal to half the amount to be distributed out of the account. As many as 250,000 IRA owners each year miss the end-of-year distribution deadline, according to the Treasury Inspector General. This generates potential tax penalties totaling $175 million.

Veterans Day 2014

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By Jessica LoPiccolo

Veterans Day is a day of celebration to honor America’s Veterans for their patriotism, love of country, and willingness to serve and sacrifice for the common good. The holiday is observed on November 11th every calendar year. The reason it is always on November 11th goes back to World War I when the fighting ceased seven months before the Treaty of Versailles on the 11th hour of the 11th day of the 11th month, in 1918. That is the date generally known as the end of “the war to end all wars.”

In 1954, President Eisenhower officially changed the name of the holiday from Armistice Day to Veterans Day.

Today, there are about 23.2 million military veterans in the United States. My dad is one of them. He was in the United States Marine Corps for 4 years where he proudly served the Commander in Chief, President Ronald Reagan, in Helicopter Marine Experimental -1 (HMX-1), the Presidential Helicopter Squadron at Quantico, Virginia. He was certified in Communications, Aircraft Maintenance, Electronic Warfare, Aircrew, and Ground Maintenance. His rank was E-4 Corporal. I received an email from my dad today stating that he was chosen for Veteran of the Month by his employer, Boeing. He has been with Boeing for 18 years where he is an engineer. I found it fitting to share this accomplishment, with Veterans Day just around the corner.

Boeing Veteran of the month award

Will My Estate Have to be Probated?

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By Roy Whited

While I have heard some very detailed definitions for the term “estate”, I especially like the one used by Certified Elder Law Attorney Thom L. Cooper during his educational seminar for seniors: He says, “It is all your stuff; all of the things that you own at your date of death; put it in a box and it makes up your estate.”

However, while you may only have one ‘box of stuff’ or estate, your estate may be made up of many different types of estates. For example you can have a probate estate, a non-probate estate, a trust estate, a taxable estate, and a non-taxable estate. In this writing we will be talking about your probate estate.

Generally, a probate estate is made up of any asset owned by an individual at their death that is subject to probate administration. The probate administration process is designed to provide proof to the probate court that the individual’s Will is genuine.

Types of assets found in a probate estate:
All assets that are owned in the individual’s name alone
All assets that are owned by the individual as a “tenant in common”
All assets that are payable to the estate of a beneficiary
All assets owed to the individual before death but are paid after the date of death
Other personal property items such as household goods, jewelry, etc.

Probating an estate can be costly and time consuming, causing delays in the distribution of assets to heirs. Call 1-800-798-5297 and schedule a free one-hour consultation with a Certified Elder Law Attorney at Cooper, Adel & Associates to learn how to avoid probate.

Congratulations to Lauren Cooper!

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Cooper, Adel & Associates would like to congratulate all the July 2014 Ohio State Bar applicants who received a passing score. A very special congratulations to our own Lauren Cooper, who has worked for the firm for the past five years.

Lauren Cooper after passing the Ohio State Bar

Estate Planning for the Modern Farming Family

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By: Senior Attorney Dan Vu

White barn with Ohio logoI have always found that farming families are more aware of the importance of proper estate planning than the general population. This is perhaps, because most farmers have a story or two of an estate plan that went terribly wrong. I am never surprised, because there are plenty of ways for an estate plan to fail, especially for farmers.

For farmers, the stakes are high and the goals are even higher. For example, most want the farm to stay in the family for their children who want to continue the farming tradition. The difficulty is somehow also providing for the children who don’t want to farm while burdening all of their children with as little tax and debt as possible. These are long-standing problems for farmers, and I am certain that the fairly recent boom in farmland prices have only exacerbated the problems.

With these issues looming, most farmers attempt to resolve them earlier than most other families. I confirmed this when I was recently working in our booth at the Farm Science Review in London, Ohio. Many farmers I met already had a revocable living trust in place. This was good news since I believe that a revocable living trust is a necessity for a farming family. If properly created and utilized, it can resolve many of the farmer’s concerns. However, I was also glad to be there to explain how a typical revocable living trust cannot, on its own, solve all of the problems that face a modern farming family.

The most often overlooked but most costly modern problem is the devastating expense of long term care. Today an extended stay in a nursing home could literally cost the farmer his or her farm because, unfortunately, a revocable living trust cannot protect the farm against these long term care costs. In fact, the State routinely requires farms to be sold to pay for the cost of long term care… and … the State will place a lien on farms that can’t be sold.

Also often overlooked is the problem of the capital gains tax. This is not a new problem but with elimination of the Ohio Estate Tax and the increase in the Federal Estate Tax exemption, the modern farming family has a new opportunity to take advantage of the “step-up in basis” rules. A “step-up in basis” occurs at a farmer’s death and it allows the family to re-depreciate assets or sell them with little to no capital gains tax. Before the changes in the estate tax, the farming family would have to choose between paying the estate tax or receiving a favorable capital gains tax treatment. With these recent estate tax law changes, many farming families can now receive favorable capital gains tax treatment without a large estate tax.

It’s not often that the government lets you have your cake and eat it too. But you do not get the full use of the “step-up” rules with a typical revocable living trust. In fact, many of these older trusts were created before the estate tax law changes and most put the farming family in a worse tax position than they would have been with no trust at all.

So if you are a farmer, it is important that you take another look at your revocable living trust and your existing estate plan as a whole. Make sure it is built to face the modern problems of today’s farming families. I know you are thinking that you already took the time to do so years ago with some attorney who you can barely recall. But unfortunately things change, so make sure your plan changes with it. Swing by our booth at next year’s Farm Science Review or better yet, call us after this year’s harvest for a complimentary appointment with one of our knowledgeable attorneys.

How Can You Reduce or Avoid High Trust Taxes?

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By Sandra K. Dennison, CPA

A recent article in the Wall Street Journal describes a strategy to avoid taxes when you put money into a trust and when you take it out. Here’s a summary of how it works:

Distributes net income to lower tax bracket beneficiary

In cases where Mom & Dad’s trust has a higher tax bracket than their beneficiary’s, there is an opportunity to save tax dollars. Trusts have fewer tax brackets and higher tax rates than individuals who have more tax brackets and lower tax rates. Consider that a trust with as little as $12,150 in assets pays the maximum tax rate – 43.4% while individuals can earn over $400,000 before they pay 43.4%. It seems clear that paying at the individual tax rate is better than paying the trust rate, in most cases.

You also have the option to look at which tax strategy (trust or individual) makes the most sense – if you get it done in the first 65 days of the year. This extended “decision time” is only available to trusts and beneficiaries.

Although appealing, distributions should not be made just for the sake of tax saving and certainly not without expert counsel. Distributing funds from a trust could produce negative consequences that far outweigh the tax savings. Respect for the purpose of the trust is more important.

Read more at: “How a Trust Can Cut Taxes” written by Arden Dale for the Wall Street Journal.