Benefits of Naming a Trust as an IRA Beneficiary

by Brian J. Hinkle

Benefits of Naming A Trust As An IRA Beneficiary

Designating a primary and contingent beneficiary of your Individual Retirement Account (IRA) is a critical part of your overall estate plan. While most married account owners name their spouse or children as primary and/or contingent beneficiaries of their IRA, other beneficial options exist.

Most notably, naming a trust as an IRA beneficiary can be an effective estate planning strategy, especially when the capacity or maturity of beneficiaries is a concern. When a trust meets certain requirements, the IRS will “look through” the trust and treat trust beneficiaries as if they were named directly as the IRA beneficiary. By doing so, the trust can take advantage of beneficial minimum distribution rules. The trust also provides an additional layer of creditor protection to the beneficiary or beneficiaries than what would be provided if the accounts were left directly to the beneficiaries.

Because of the complexity involved, account owners should meet with their legal and financial advisors annually to review their IRA and other beneficiary designations to ensure that they meet their overall planning goals.

Year-End Tax Planning Considerations

As we begin wrapping up the year, it is time to think about year-end financial considerations. For many of us, charitable giving is one of them. When thinking about how much your contribution should be for this year, there are number of issues that sometimes come into play. In general the amount that you are able to make in charitable contributions is a fraction of your adjusted gross income on your income tax return. That fraction varies if you are making a gift to a public charity or a private foundation. Most people are making them to public charities such as their church, school, community foundation, YMCA, or the like. Consequently in those cases you may gift up to 50% of your adjusted gross income and claim a tax deduction for that gift.

Sometimes people are able to make gifts of either cash or an investment of some kind. For instance, if you have stock with a substantial capital gain and would rather not sell the stock and incur the taxable gain, you may want to consider using that stock to make a substantial charitable gift and get the full benefit and value of the asset as a tax deduction. Another thing that some people should consider is the possibility of making a substantial gift in the current year as a result of a substantial gain that may have come out of the sale of a business interest or the like, into a donor advised fund with a local community foundation which will be able to pay out to your favorite charities portions of that gift over several years to come. The tax deduction may be extremely valuable to you in a year when you sold the business interest, and you will want to continue some normal giving patterns that you have developed over years out of the funds that you set up in the donor advised fund at the local foundation.

The beauty of most charitable gifts are that you get the full benefit of the face value of the asset you are giving, even though you may be taxed substantially if you were to sell or withdraw that asset from an account, such as, your IRA. In this regard, it is noteworthy that you may make gifts of up to $100,000 a year to a charity out of your IRA and never pay any income taxes on the gain within your IRA for that particular withdrawal. A classic withdrawal from an IRA is going to be taxed at ordinary income tax rates, but this gift will be tax-free with 100% of the value going to and for the benefit of the charity of your choice.

Importance of a Properly Drafted Power of Attorney

By: Jacob H. Kiessling, Esquire

Power of Attorney

A power of attorney (POA) is one of the three documents commonly used to implement an estate plan (a will and a living will being the other two). At least every five years, an estate plan should be reviewed to consider changes in the laws, your family and financial situation, your intentions regarding fair and equitable distributions under your estate plan and your probate assets (distributed per your will) and non-probate assets (distributed per beneficiary designation or by law).

With medical advances extending our life expectancies and sometimes the period of our mental or physical incapacities, the POA has become an increasingly important tool. Reflecting that fact and for other purposes, Act 95 of 2014 updated the law relating to POAs in Pennsylvania, with a January 1, 2015 effective date. While POAs signed before that date are still legally recognized, some POAs drafted prior to 2015 may no longer have the legal effect and usefulness as originally intended.

The purpose of a POA is to appoint an agent of your choice to act on your behalf with regard to your financial affairs and/or healthcare decisions. An agent is an individual or company (such as a bank) who will handle your financial and medical affairs should you become unable to do so. By appointing an agent while you are of sound mind and have legal capacity, you often can avoid the cost, additional court oversight and complexity of a guardianship proceeding through which the court appoints a guardian of your person and /or estate.

When having a POA drafted by an attorney, there are many considerations that you, the person granting the powers (referred to as the principal), must keep in mind. First, who will be your agent? The powers granted to your agent can be substantial, so you must be sure that your agent is trustworthy and will act in your, not the agent’s, best interest.

Second, will you appoint one agent or multiple agents who will act as co-agents? Appointing co-agents who must act jointly can provide a safeguard against any one agent taking actions in his best interests, but co-agents can present problems at banks and other financial institutions due to their reluctance to get caught in the middle of an agent attempting to exercise his powers without the joinder of the other agent(s). Therefore, successor or multiple agents authorized to act alone may be the better choice.

Third, you must determine which powers you want your agent to have. Prior to 2015, many POAs were drafted to grant to the agent the power to do anything and everything that the principal might do on his own behalf. While still possible now, such broad and far-reaching language is no longer legally sufficient. Under the new law governing POAs, certain powers must be specifically authorized in the POA for the agent to have the ability to exercise such powers. These powers are commonly referred to as “hot powers” and include, among others, the power to make gifts, create or change beneficiary designations, delegate authority granted under the POA, or exercise fiduciary powers which the principal has authority to delegate.

Another consideration in creating a POA is the different names the principal has used over the years. Occasionally, individuals have accounts with financial institutions under a variety of names. For example, a principal, John Carl Doe, may have his bank accounts under the name John C. Doe, while his investment accounts may be under the name John Doe. In such a situation, it is important that the POA name the principal as John Carl Doe, a/k/a John C. Doe, a/k/a John Doe. Listing the variations of the principal’s name in the POA is important to allow the agent to act on behalf of the principal with regard to each asset held under a different name variation to reduce the risk of a company not accepting the POA.

Mette, Evans & Woodside attorneys can work with you to address these and other considerations as you create or update your power of attorney as part of your comprehensive estate plan.

Medicaid-Medical Assistance Crisis Planning for Married Couples

by Brian J. Hinkle, Esquire

Medicaid-Medical Assistance Crisis Planning for Married Couples

With the cost of skilled nursing care exceeding $100,000 per year in some parts of Pennsylvania, a married couple’s assets can be quickly consumed by the cost of one spouse’s care in the event they become institutionalized in a skilled nursing facility. Assuming that a crisis plan is not implemented when one spouse enters skilled nursing care, an “institutionalized” spouse will become financially eligible for Medicaid/Medical Assistance only when the couple’s “available” resources are reduced below a certain level. This process, known as “spend down,” often leaves the healthy spouse, known as the “community spouse,” with only a fraction of the resources they once had. The end result is an increase in the odds that the community spouse will become dependent on others in the future should they no longer have sufficient resources to support themselves.

Although certain resources are deemed unavailable and therefore exempt for purposes of spend down, many resources are not. For example, resources such as bank accounts, investment accounts and the institutionalized spouse’s retirement accounts, are considered to be available resources. Currently, half of these available resources, up to a maximum of $119,220, are automatically protected from spend down and may be retained by the community spouse. This is known as the “Community Spouse Resource Allowance.” A nominal amount, known as the “Institutionalized Spouse Resource Allowance,” of either $2,400 or $8,000, is also exempted from spend-down. The remainder of the available resources, however, must be spent down prior to the institutionalized spouse becoming financially eligible for Medicaid.

This harsh reality can be avoided, however, if a crisis plan is put into place. The follow scenario illustrates the benefit of implementing an appropriate Medicaid crisis plan:

Jim, 75, and Jane, 68, own a home worth approximately $350,000; two cars, each worth $35,000; have $250,000 and $200,000 in their respective IRAs; and they have an additional $200,000 in a brokerage account. Both of their wills provide that their assets shall become the property of the surviving spouse upon death and that their two children will receive what is left after both have passed. However, Jim suddenly develops severe dementia, can no longer live at home, and enters a skilled nursing facility that costs $10,000 per month.

The home, one car and Jane’s IRA are unavailable resources and do not need to be spent down on Jim’s care. Conversely, Jim’s IRA, the value of one car, and the brokerage account, the value of which totals $485,000, will be deemed to be available resources. If no crisis plan is implemented Jane will merely be able to keep $119,220 of the available resources. She will be required to spend the remaining available resources, $355,780, on Jim’s care before he will become eligible for Medicaid/Medical Assistance. However, if Jane consults an experienced attorney and implements a crisis plan when Jim enters the skilled nursing facility, all of the available resources can be protected from spend down and Jim will immediately become financially eligible for Medicaid/Medical Assistance.

In my next article I will focus on pre-planning strategies for individuals and married couples that reduce or eliminate the need for crisis planning.

This article does not constitute legal advice and the transmission of information contained herein is not intended to create, nor does its receipt constitute, an attorney-client relationship between Mette, Evans & Woodside and the recipient.

Digital Assets Create New Problems when Planning Estates

Heather Stauffer – Central Penn Business Journal

Digital Assets Create New Problems When Planning Estates

Imagine forgetting all your passwords and being locked out of your online accounts.

That, legal and financial experts say, is almost exactly the unenviable position your business and personal heirs could be in if you don’t make adequate preparations to pass on your digital assets.

“You’re seeing more and more people who keep all of their records digitally,” says Brian Hinkle, an attorney at Mette Evans & Woodside. Traditionally, mailed statements alert executors to the condition of an estate; these days, bills could be going to an email address that survivors are unaware of or do not have access to.

At Barley Snyder LLP, one decedent had arranged for his mortgage to be paid automatically by electronic transfer, says Brian Ott, partner and chairman of the firm’s personal planning group. The problem was, he hadn’t left the information necessary for an executor to access the account.

“We couldn’t stop that after the fact,” Ott says.

Another hypothetical scenario several local financial planners cite is a decedent who had sold a vehicle and accepted payment to a PayPal account –— but none of her heirs knew about the account and it wasn’t listed in her records, so they didn’t get those thousands of dollars. In a business scenario, it could be even worse.

“The stakes are much higher, because you’re talking about things like payroll and rights of employees,” Ott says.

To avoid problems, experts say, you should compile a list of all your digital assets and the information necessary to access them, keep it in a safe place and update it regularly. You should also ask your adviser to include language in your will and power of attorney giving your heirs authorization to take over your digital accounts.

The will is not enough, because it kicks in only at death, says Andrew Rusniak of McNees Wallace & Nurick LLC. The language should be in your power of attorney, too, in case you are incapacitated –— and, as Hinkle notes, time can be of essence for online accounts, as some may be automatically deleted after a period of inactivity.

Financial accounts aren’t the only ones to worry about.

Andrew Horwitz, vice president of Wilmington Trust, says the legal definition of digital assets is still being worked out, but any online account you have might be of value to your heirs. Maybe it’s the photos you store on a media site and nowhere else or your medical records, a domain name or frequent flier miles.

“Today, people can have thousands of songs stored digitally worth a lot of money,” says Horwitz. “There’s lots of other stuff out there.”

Security and access are two issues you should consider when compiling a list of your digital accounts and passwords, experts say. The information needs to be safe but also easy for an executor or heir to find if necessary.

“Everence doesn’t recommend that our clients give account passwords to us,” says Jamie Detweiler, an adviser at Everence Financial Advisors. Instead, he says, they recommend using tools such as a personal financial affairs directory and a comprehensive financial planning service “that helps people keep track of their accounts in a unified fashion. A feature of this service is the ability to share account information with the members of their adviser team without having to share passwords and digital account access.”

Because people change passwords and add accounts, Horwitz recommends updating digital information at least annually, preferably tied to an event such as a birthday, anniversary or the beginning of a season.

Troubleshooting

“The law really hasn’t caught up with changes in technology,” says Brian Ott, partner at Barley Snyder LLP and chairman of the firm’s Personal Planning Group.

In Pennsylvania, the most notable attempt to address the legal issue was House Bill 2580, which would give a personal representative “power over decedent account on social networking website, microblogging or short message service website or email service website.” It was referred to the judiciary committee in 2012.

Most other states are similarly situated, local attorneys say, so there has been much attention on the Uniform Law Commission’s model legislation, which was approved at the national organization’s July meeting. It is broader than HB 2580, treating digital assets as equivalent to tangible ones, and in August Delaware became the first state to enact a bill based on it. The legal community is watching to see what happens there.

www.cpbj.com

Long-Term Care Planning

by Brian Hinkle

Long-Term Care Planning

Traditional estate planning focuses on what will come of an individual’s assets after they pass. It does not address the reality that there is a 70% chance that individuals over 65 will require some type of long-term care, including entry into a skilled care facility. For many people, going to a skilled care facility, for any length of time, results in a significant loss of assets. These are assets that would otherwise have been used to prevent the impoverishment of their surviving spouse or were intended to be passed on to future generations.

Comprehensive long-term care planning can help prevent the depletion of these assets.

Let’s consider an example. Jim is 75 and his wife Jane, 68; own a home worth approximately $350,000. Their other assets include two cars, each worth $35,000; they have $250,000 and $200,000 in their respective IRAs; and they have an additional $550,000 in other assets. Both of their wills provide that upon death their assets will become the property of the surviving spouse and that their two children will receive what is left after both have passed. However, Jim develops severe dementia. Now Jim can no longer live at home and must enter a skilled care facility that costs $9,000 per month.

Upon entry to the skilled care facility, an application for Medicaid, or Medical Assistance (MA) in Pennsylvania, is submitted to determine if Jim is eligible. It’s determined that their home, one car and Jane’s IRA are exempted. However, Jane will only be able to keep a little more than $100,000 from the couple’s other resources for herself and will be required to spend the remaining assets on Jim’s care before he will even become eligible for Medicaid/MA.

An experienced elder law attorney may be able to limit the depletion of Jim and Jane’s assets, despite the lack of long-term care planning. A better option, to help avoid this situation, is to have an elder law attorney develop a comprehensive estate and long-term care plan five or more years prior to Jim’s need for skill care.

The practice of elder law is not, however, limited to the legal issues surrounding estate and long-term care planning and Medicaid/MA eligibility. It can include, among other things, advising and representing clients on issues related to retirement planning, gift and estate tax issues, guardianship proceedings, special needs trusts and other matters.

As you can see, elder law practitioners must be able to address any issues that may arise throughout the lifetime, and thereafter, of a client. At Mette, Evans & Woodside we bring together many attorneys with diverse legal disciplines and vast professional networks to help you and your loved ones address the many facets of life. If you have any questions, please contact us.

Brian J. Hinkle, Esquire
bjhinkle@mette.com
(717) 232-5000

The Effect of the DOMA Decision on Estate Planning in Pennsylvania

doma-marriage-ringsRecently, the United States Supreme Court declared that the federal government must honor a state’s decision giving same-sex couples the right to marry and that not recognizing such marriages was a violation of basic due process and equal protection principles of the married same-sex couples. In the case of United States v. Windsor, the Court declared unconstitutional key provisions of the Defense of Marriage Act (DOMA). Enacted in 1996, DOMA defines “marriage” for purposes of federal law as a legal union only between a man and a woman as husband and wife.

The Windsor case arose when the surviving spouse of a same-sex married couple in New York state was denied an estate tax benefit that was available to opposite sex couples. At the time the spouse died New York had already passed legislation recognizing same-sex marriages; nevertheless the Internal Revenue Service followed DOMA and did not recognize their marriage. This resulted in a $363,053 tax bill to the surviving spouse who then filed suit in federal court arguing that DOMA, in excluding same-sex spouses from the definition of marriage, deprived her of her constitutional right to equal protection. The Supreme Court agreed and held that this section of DOMA is unconstitutional. As a result, the federal government is prohibited from placing any classification on the recognition of marriages – leaving the question of whether same-sex couples can marry to the states.

Although this was a victory for equal marriage rights advocates, Pennsylvania also has a defense of marriage law dating back to 1996 that defines marriage as between a man and a woman (23 Pa.C.S 1704). Essentially, Pennsylvania doesn’t recognize same-sex marriages even if they take place in states where these marriages are legal. Accordingly, state benefits for Pennsylvania residents are not affected by the Windsor decision. Yet the decision leaves several unanswered questions: How will this decision affect eligibility for federal benefits of same-sex couples who were legally married in one state but now live in a state that does not recognize same-sex marriage, such as Pennsylvania? Will Pennsylvania’s non-recognition of same-sex marriages impact the availability of federal benefits?

For now, the answer is an unsatisfying one: Much will depend on the particular federal agency providing benefits. If the agency evaluates benefits eligibility based upon the laws of the state of residence, then a same-sex married couple married in another state but residing in Pennsylvania would not be considered married. However, if the agency determines eligibility based upon the laws of the state where the marriage took place, then the couple would likely be eligible for married benefits. The place of residence standard is followed by the Internal Revenue Service, the Social Security Administration and the Department of Veteran’s Affairs, but there is no federal rule requiring federal agencies to use one method over the other. Since Pennsylvania doesn’t recognize same-sex marriages, agencies such as the Social Security Administration or the IRS may not recognize same-sex marriages performed in states (or in Washington, D.C.) where they are permitted if those couples eventually become Pennsylvania residents. The result is a mess that is going to have to be fixed either by Congress via legislation, President Obama via regulation, or by the courts through civil lawsuits.

Given the importance of this issue and the many unanswered questions the Windsor case has raised, a lot of discussion on this topic will be generated in the ensuing months. For now, however, the only way for same-sex couples in Pennsylvania to ensure that their loved ones will be protected and their plans will be carried out is to put a solid estate plan in place. The estate planning attorneys at Mette, Evans & Woodside are available to help nontraditional couples in Pennsylvania create an estate plan that follows their wishes, taking into account the legal relationship between the evolving state and federal law on these issues.

The Perils of Joint Bank Accounts

by Timothy A. Hoy

The Perils of Joint Bank Accounts

Many people set up joint bank accounts with a friend or child for “convenience,” so that the other person on the account can easily write checks, pay bills, and otherwise assist with daily financial chores. Other times, joint bank accounts are used as a rudimentary form of estate planning – to provide for the automatic ownership of the funds by the surviving owner. However, there are several risks involved when adding another person to a bank account for “convenience” or “just in case” purposes. Before creating a joint bank account, one should be aware of some of the potential consequences of that decision.

The real benefit to establishing a joint bank account is that it is a simple and easy way to make sure that someone else will be able to access your funds. There is little paperwork to set up the joint account, and it is very easy for everyone to get money out. While sometimes this situation will work out perfectly fine for the original account holder, often there are several problems that will arise.

The Other Joint Account Holder Will Have Unrestricted Access to the Funds

Typically, either party to a joint bank account has the right to make unlimited withdrawals, regardless of who deposited the money. Each joint owner will be able to withdraw money from the account freely, without the other owner’s permission.

Some people unfortunately take advantage of the easy access to money in a joint account. In some cases, joint owners who were supposed to be managing an older relative’s money have improperly used the money for their own benefit. With a joint bank account, the once trustworthy niece faced with financial difficulties can now invade her aunt’s savings without knowledge or consent. While it is possible to take legal action under these circumstances, it is often very difficult, expensive, and time-consuming to attempt to get the money back.

The Money Could Get Caught in the Middle of the Other Joint Owner’s Legal Problems

A joint bank account may be vulnerable to legal attacks by creditors of either joint owner. For instance, if a joint bank account owner goes through a divorce, his spouse could claim a right to some of the funds in the account. Even if the joint owner who deposited all of the money could prove that he contributed all of the funds to the account, he might have to go to court to stop the other owner’s spouse from getting the money. Another possible scenario is that an adult child, whom has been added by his parent to a joint account, is sued by a creditor, or gets involved in a serious automobile accident and is sued for more than the policy limits of his insurance. If a judgment is entered, the judgment creditor has the right to ask the child, under oath, about all of his assets and the location of any bank accounts in which he has an interest. The parent may not have notice of the looming disaster until the joint account is garnished. At that time, the account could be frozen, and the money could be turned over to the creditor, unless the parent were to appear in court and succeed in having the garnishment set aside. In the meantime, outstanding checks may bounce, credit may be affected and legal fees will be incurred – without a clear path to a successful outcome.

Other Considerations

There are other pitfalls that are associated with joint bank accounts. For example, the estate may have to pay an inheritance tax on the funds in the account to which someone else’s name was added, even though it was assumed the account would automatically pass to the joint account owner outside the estate probate process. Pennsylvania imposes an inheritance tax on jointly held property upon a joint tenant’s death. For example, if a parent contributes 100% of the funds in an account held jointly with a child and survives the child, one-half of the proceeds held in the account will be deemed taxable to the deceased child. This result can seem unjust and may be an unintended consequence of hasty planning. Another consideration that is not as common, but should be considered, is the impact on Medicaid. Transferring property into joint ownership with other people can be considered divestment under the Medicaid regulations. The penalties for divestment include, among other potential items, disqualification from receiving benefits and a disqualified person may have to sell property which is otherwise exempt to pay nursing home expenses.

Conclusion

Jointly held property ownership can be a very effective and inexpensive way to transfer property at death, if everything goes according to plan. However, unforeseen developments can make this a very expensive substitute for a proper estate plan. If one is thinking about adding someone to a bank account for convenience or estate planning purposes, the risks and benefits should be weighed carefully. There are better and safer ways to make sure that one’s heirs receive deposited funds after death. Alternatives, such as pay-on-death accounts, durable powers of attorney and the benefits of implementing a comprehensive estate plan, should be discussed with an attorney.