Wednesday, January 15, 2020

New Law Changes Rules for IRAs and 401(k)s

A new law, which became effective on January 1, 2020, makes major changes to the rules governing retirement plans. The new law is designed to increase the availability of retirement plans to workers and thus the amount of money that workers are saving in retirement accounts. But it also includes negative tax consequences that will be felt by most non-spouse beneficiaries who inherit an IRA or other retirement plan on the death of the account owner.
The Setting Every Community Up for Retirement Enhancement (SECURE) Act of 2019 changes the law governing retirement plans such as 401(k)s, traditional IRAs, and Roth IRAs. Notable changes made by the SECURE Act include:
Stretch IRAs. This change affects beneficiaries who inherit a retirement plan from an account owner who dies after 2019. Under the old pre-SECURE Act law, designated beneficiaries* who inherited an IRA, 401(k) or similar retirement plan were permitted to spread-out their withdrawals from the account over their own life expectancies. For younger beneficiaries, withdrawals (and income taxes) could thus be deferred for 30 or 40 years or more.  During this time the accounts could continue earning income on a tax-deferred basis with only yearly required minimum distributions (RMDs) being taxed. This was referred to as “stretching” the IRA.
Under the SECURE Act most non-spouse beneficiaries will be required to withdraw (and pay tax on) all of the money in the inherited account within 10 years of the death of the account owner.  This can create a major income tax problem for beneficiaries of larger retirement plan accounts. (Note that this new 10-year limit only applies to retirement accounts where the account owner dies after December 31, 2019. If you have inherited an IRA from an account owner who died in 2019 or earlier the old pre-SECURE Act rules continue to apply).
Exceptions to the 10-year rule apply if the designated beneficiary is an “eligible designated beneficiary.” This class includes:
  • the surviving spouse of the deceased account owner;
  • a surviving child of the deceased account owner if the child has not reached the age of majority (but only until the child reaches the age of majority – 18 in Pennsylvania);
  • disabled individuals within the meaning of IRC Section 72(m)(7);
  • chronically ill individuals within the meaning of IRC Section 7702B(c)(2), with some exceptions;
  • individuals who are not more than 10 years younger than the deceased account owner.
The change in the RMD rules can have significant estate planning implications.  Of particular concern are plans that use trusts as beneficiaries of retirement accounts. Those trust-based plans need to be reviewed and perhaps revised due to the new law.
Starting Age for RMD Requirement. Under the old law, account owners were required to begin taking minimum distributions from their IRAs beginning the year they reached age 70 ½. Under the new SECURE Act law, individuals who were younger than 70 ½ at the end of 2019 can now wait until age 72 to begin taking minimum distributions. Note: if you turned 70 ½ in 2019 the old law still applies and you still need to withdraw your RMD for 2019. Failure to do so will result in a 50% penalty of your RMD. On the other hand, if you were born on July 1, 1949, or later, you can delay taking RMD withdrawals until age 72.
Withdrawals for Birth and Adoption. The new law allows a withdrawal of up to $5,000 from a retirement account without an early withdrawal penalty in the event of the qualified birth of a child or an adoption of a child under age 18. The withdrawal must be made within one year after the qualifying event. If there are two parents and both have retirement plans, they may each be able to withdraw $5,000. These withdrawals will avoid the penalty for early withdrawal. Generally, the amounts an individual withdraws before reaching age 59½ are subject to an additional 10% early withdrawal tax unless an exception applies.
Employer Incentives. The new law includes increased credits and incentives to encourage small businesses to start a retirement plan and auto-enroll employees. It also makes it easier for small businesses to join multiple-employer plans.
Annuities. The new law removes roadblocks that made employers wary of including annuities in 401(k) plans by eliminating some of the fiduciary requirements used to vet companies and products before they can be included in a plan.
In light of the changes made by the SECURE Act, owners of IRAs and other retirement plan accounts may need to re-evaluate their estate plans. This is especially important if the retirement account is large or if it is payable to a trust. Such trusts may need to be revised to conform to the new rules. If IRAs are part of your estate plan consult with your elder law attorney to determine if you need to make changes.
The SECURE Act makes a number of other changes to the law governing IRAs and other retirement plans. Click here for the House Committee on Ways and Means section by section summary of the new law. The SECURE Act was included as Division O of the massive spending bill H.R. 1865.
* The term “designated beneficiary” means an individual designated as a beneficiary by the account holder (and certain trusts).

Friday, December 20, 2019

What is the Medicaid Transfer Penalty?

When you need long-term care at home or in a facility the costs can be staggering. That is why qualifying for government benefits through Medicaid is crucial to the financial, physical and emotional health of so many seniors and their families.
Unfortunately, qualifying for Medicaid long-term care benefits can be very difficult. One of the obstacles is the so-called “transfer penalty.” A period of ineligibility for benefits (transfer penalty) is imposed if an applicant has disposed of assets for less than fair market value during a five-year look-back period.
Imposition of a transfer penalty denies benefits for individuals who otherwise need and would qualify for Medicaid long term-care coverage. A denial can also effectively make an individual’s children liable for the costs of the needed care. See: Law Can Require Children to Pay Support for Aging Parents.
The transfer penalty applies when a transfer was made by the individual applying for Medicaid long-term care benefits, or their spouse, or someone else acting on their behalf. Unless the transfer is for some reason exempt, if an asset was transferred for less than fair consideration within the look-back period, then a period of ineligibility is imposed based on the uncompensated value of that transfer.
New Penalty Divisor for 2020
The length of the penalty period is calculated by taking the uncompensated value of the asset transfer and dividing it by the average private patient cost of nursing facility care in Pennsylvania at the time of application for benefits. The average cost to a private patient of nursing facility care is often referred to as the “private pay rate” or the “penalty divisor.”
The penalty divisor is revised each year as nursing facility care costs increase. As of January 1, 2020, the penalty divisor is set at $352.86 per day. This means that the PA Department of Human Services has calculated that the average monthly nursing facility private pay rate in Pennsylvania is $10,732.83 a month. [Please note that the penalty divisor is different in states other than Pennsylvania].
Uncompensated transfers made during the look-back period will be calculated at one day of ineligibility for every $352.86 transferred away. In Pennsylvania, a transfer penalty will be imposed when the value of transfers made in a month exceeds $500.
The rules are complicated. Seniors considering making gifts or other transfers of assets are well advised to consult with an experienced elder law attorney before completing the transaction.  If you live in Pennsylvania you can contact the elder law attorneys at Marshall, Parker and Weber for more information.

Thursday, December 12, 2019

Medicare Part B Premium and Deductible to Rise in 2020

Medicare is the vital healthcare program that covers most older Americans. It’s a complicated program. This article will take a look at one of its components – Medicare Part B and Part B’s premiums.   
Medicare Overview
Medicare is the federal health insurance program that covers people 65 and older and some younger adults with permanent disabilities and certain medical conditions. When Medicare was established in 1965 about half of American seniors had no health insurance. Today, virtually all Americans over age 65 have at least some health coverage through Medicare.
Medicare does not cover all health care services. For example, Medicare generally does not pay for long-term care services, regular eye exams and eyeglasses, hearing aids, or routine dental care.
Medicare coverage is divided into four parts – Part A, Part B, Part C (Medicare Advantage), and Part D.
Part A (Hospital Insurance) covers inpatient hospital care, some limited skilled nursing facility stays, home health care, and hospice care.
Part B covers physician services, outpatient hospital care, and some home health visits. It also covers laboratory and diagnostic tests, such as X-rays and blood work; durable medical equipment, such as wheelchairs and walkers; certain preventive services and screening tests, such as mammograms and prostate cancer screenings; outpatient physical, speech and occupational therapy; outpatient mental health care; and ambulance services.
Part D is prescription drug coverage.  
Part C (Medicare Advantage) allows beneficiaries to choose to receive their Part A, B, and D services through a private managed care insurance plan rather than original Medicare.  
Medicare Part B Premiums and Deductible
Over 90% of eligible Medicare beneficiaries enroll in Part B and over 70% use Part B services during a year. Part B generally pays 80% of the approved amount for covered services in excess of the annual deductible ($185 in 2019 and $198 in 2020). The beneficiary is liable for the remaining 20%. Many beneficiaries purchase a Medicare Supplement (Medigap) policy to cover that exposed 20%.
Part B coverage is not free. You pay a premium each month for your Part B coverage. If you get Social Security, Railroad Retirement Board, or Office of Personnel Management benefits, your Part B premium is deducted from your benefit payment. If you don’t get these benefit payments, you’ll get a bill. 
The Centers for Medicare and Medicaid Services (CMS) has recently announced that the standard monthly Part B premium for 2020 will be $144.60. This is an increase of $9.10 over the 2019 amount. Some beneficiaries will pay substantially more while those with low incomes and limited resources can get help paying the premiums through several Medicare Savings Programs.
Your monthly Part B premium will be increased if you are subject to penalty for late enrollment or reenrollment. Premiums are also increased for individuals with higher incomes. This is referred to as your Income Related Monthly Adjustment Amount (IRMAA). The Government uses the taxpayer’s recent (2018) federal income tax return to determine if they are subject to an IRMAA premium adjustment. The calculation is based on your adjusted gross income plus tax-exempt interest income. This is referred to as your modified adjusted gross income (MAGI)Here are the IRMAA adjusted Part B monthly premium amounts for 2020:
If your MAGI income in 2018 was (you will pay in 2020)
You pay each month (in 2020)
File as Single on tax return
File joint tax return
File married separate tax return
$87,000 or less
$174,000 or less
$87,000 or less
above $87,000 up to $109,000
above $174,000 up to $218,000
Not applicable
above $109,000 up to $136,000
above $218,000 up to $272,000
Not applicable
above $136,000 up to $163,000
above $272,000 up to $326,000
Not applicable
above $163,000 up to
above $326,000 up to
above $87,000 up to
$499.999.99                $799,999.99                         $412,999.99

$500,000 and above              $750,000 and above             $413,000 and above                             $491.60                           
Filing Single rates also apply to Head of Household and Qualifying Widow filings.
Special rules may apply to lower your IRMAA premium is some situations where your income has come down due to changed circumstances.   Click here for more information.
Note: If you have joined a Medicare Advantage Part C Plan, you still have Medicare. You'll get your Medicare Part A (Hospital Insurance) and Medicare Part B (Medical Insurance), and perhaps Medicare Part D (Drug) coverage from the Medicare Advantage Plan and not Original Medicare. Medicare Advantage Plans have different rules and charge different out-of-pocket costs. Those rules and costs change each year.
Related Links:

Thursday, November 28, 2019

What are Trusts and How can you use Them?

What is a trust? There are so many different kinds of trust arrangements that it is impossible for me to provide a simple answer to this question. But the trust is such an important estate planning device for many seniors that I will try to provide the reader with a basic understanding of trusts and how they are used. This article will focus not on trusts used by the wealthy, but on their use by Average American individuals and families.   
A trust is an arrangement involving three parties:
1)    the Settlor (or Trustor) – the person setting up the trust and transferring assets to it;
2)    the Trustee – a person or firm that holds and administers the assets for the benefit of others; and
3)    the beneficiary – the person for whose benefit the assets are being held and administered.
A trust can have multiple settlors, trustees, and beneficiaries.
With an estate planning -trust you (the “settlor”) transfer legal title to assets you specify to a “trustee” to be held and managed by the trustee and distributed to the beneficiaries in accordance with your directions. With some trusts you can name yourself as Trustee. Often people will name a family member or a professional trust company as trustee or co-trustee. You can also name yourself as primary beneficiary and designate other “contingent” beneficiaries in the event of your death.
Here are some examples of trusts that are commonly used as part of the estate plans of individuals and families.
Illustration 1Financial Management Trust.  Mary, a widow with two children, has approximately $225,000 in various savings and retirement accounts.  With the help of her elder law attorney Mary creates a trust agreement that names a carefully chosen Bank trust department as the trustee. The trustee assigns a trust officer to Mary who helps get the trust set up and funded from Mary’s savings. 
In accordance with Mary’s instructions, the trustee will then begin paying Mary’s bills each month. It will pay Mary’s real estate and estimated income tax payments as they come due.  The trustee will deposit money in Mary’s checking account each month as needed for her personal use. Mary can increase or decrease the mount of her monthly draw by phoning her trust officer.  If Mary wants more money for any reason, she calls her trust officer and money is transferred to her checking account. The trustee invests Mary’s money in a manner approved by Mary in advance so that it is consistent with her risk tolerance. Mary gets a full accounting statement in the mail every three months. She can check her account anytime online.    
Upon Mary’s death the Trustee will pay her final expenses from the trust funds and distribute the remainder to her children. Mary can change this distribution at any time. Mary can also cancel the trust at any time and all of the money will be returned to her.  
In the above illustration Mary is the Settlor, the Bank is the Trustee, and Mary is the Primary Beneficiary of the Trust. Mary’s children are called contingent beneficiaries.  Lawyers call this kind of a trust a revocable “inter vivos trust” or “living trust.”  It is revocable because Mary (the Settlor) can undo it at any time during her life. (“Inter vivos” means between living people and here the Settlor is alive. On the other hand, a “testamentary trust” is one that is created in the Settlor’s Will and which takes effect after the death of the Settlor.)
A revocable inter vivos trust can be an excellent way to set up a financial care management arrangement for an older adult.  For more information on this arrangement see my article Who to Choose as your Financial Pinch-Hitter – a Family Member or a Trust Company
Illustration 2 – Special-Needs Trust. Miriam is a widow with two children: Ron, age 33, works with computers at Penn State’s main campus. Allen, age 31, has a developmental disability. Allen resides with Miriam and works part time on the maintenance staff of a local hospital.  He currently receives SSI and Medicaid benefits.  Ron and Allen have always been very close.
Miriam wants to leave an inheritance to Allen but is worried that an inheritance would cause Allen to lose his SSI and Medicaid benefits.
Miriam’s elder law attorney drafts a will that includes a special-needs trust (SNT) for Allen. Upon Miriam’s death ½ of her estate will pass to this trust. When properly drafted and administered this trust will provide for Allen’s needs while preserving his right to receive means-tested public benefits like SSI and Medicaid. The lawyer and Miriam discuss the kinds of expenses that can be paid from the trust, and Miriam decides to name her other son, Ron, as Trustee with a Professional Trust Department as back-up. Upon Allen’s death any funds remaining in the trust will be distributed to Miriam’s grandchildren.
The elder law attorney also suggests that both Miriam and Allen have powers of attorney drafted, and that Allen should consider whether he should set up an ABLE account.
Illustration 3 - Home Protection Trust. Ken and Virginia are both in their early 70s. They married when Ken got back from Vietnam in 1969. They have a daughter, Betty Lou, with whom they are very close. Betty Lou has had a hard life so far, and her parents want to ensure that they are able to leave her an inheritance when they are gone. They also have a son Sam. Sam lives in Pittsburgh with his wife and a child and has a good job as a pharmacist.
Like many couples, Ken and Virginia’s home is their most valuable asset. A house down the street recently sold for $280,000.  In addition to the home, the couple has about $200,000 in savings.
Last year Virginia’s mother died at age 94. Her mother had received long-term care services at home for almost two years before moving to a nursing home where she spent the last 28 months of her life. Her mother had worked for over 40 years as a bookkeeper and had saved as much as she could for retirement. But all these savings were wiped out to pay for her care needs. And, after her death, the state forced Virginia to sell her mother’s home and pay the proceeds to the government to reimburse it for money Medicaid had paid toward the cost of her mother’s care. Virginia learned this is called Medicaid Estate Recovery. Virginia doesn’t want the same thing to happen to her home when she and her husband are gone. She wants to ensure that the home will go to Betty Lou.
Ken and Virginia meet with an elder law attorney and discuss how to best protect their home for themselves during their lives and for Betty Lou after they are gone. They discuss the consequences and dangers  of giving the home to Betty Lou outright.
After discussing their options, Kenn and Virginia decide to place their house in a home protection trust. In order for the home to be protected from nursing home and other care costs, the trust needs to be irrevocable, which means that Ken and Virginia cannot cancel it. But they can live in the home for the rest of their lives, and if they ever want to move, the trust can sell the home and buy another residence for them.
The lawyer explains that because of Medicaid’s 5-year look-back rule, it is best to transfer the settlors home to the trust while the settlors are relatively healthy.   
When held by the trust, their home (and any other assets they decide to transfer) can be protected from Medicaid estate recovery in the event one or both of them ever have a long expensive stay in a nursing home. And since the trust, rather than a child, hold legal title to the property it is protected from divorce or other bad things that may happen in their child’s life as well.
The elder law attorney suggests that a Family meeting might be a good idea to bring Betty Lou and Sam into their parents’ trust planning. See: A Family Meeting as Part of Effective Estate Planning. The meeting is held when Sam is in town visiting his sister and parents. He is totally on-board with the idea of Betty Lou getting the house someday.; And Sam and Bett Lou agree to serve as co-Trustees of the trust.
These are just a few examples of common ways that trusts are used to help seniors with their lifetime and estate planning. There are dozens of different types and uses of trust. Trusts are not just for the wealthy.
This article is intended to be just a starting point. Talk with your elder law attorney about whether and how a trust might help you achieve your planning goals. If you live in Pennsylvania, you can call Marshall, Parker and Weber for expert help in putting together a plan that best meets your unique situation and goals.