The Wiewel Law Firm

The High Cost of Medicare Mistakes

“She recently enrolled in traditional (Parts A, B, and D) Medicare and was hit with huge Part B and Part D monthly premiums. She had no idea why it was so high. After many letters, calls, and meetings with Social Security, she still had no idea.”

A 68-year-old woman knew that she had to sign up at age 65 for Medicare Part A for hospital care and Part B for outpatient care, since she did not have employer provided health insurance from an employer with 20 or more employees. She knew also that if she did not have health insurance from an employer and didn’t sign up immediately, she’d face a penalty with higher Part B and Part D premiums for the rest of her life when eventually she did sign up, reports Forbes in the article “Beware Medicare’s Part B Premium Penalty And Surcharge Traps.”

Here’s where it got sticky: she thought that Medicare provided an eight-month special enrollment period after one job ended to apply penalty free. She is employed on a sporadic basis, so she thought she had a window of time. Between the ages of 65 and 68, she had several jobs with large employers, and was never out of work for more than eight months.

She was out of work for 25 months total between ages 65 and 68, when she was not enrolled in Medicare. She thought that since she was never out of work for more than eight months, she didn’t have to sign up until she officially stopped working and would then enroll penalty free in traditional Medicare Parts A, B, and D.

She had read information on the Medicare website and her interpretation of the information was wrong. It was a costly mistake.

In determining whether you need to permanently pay a Medicare Part B penalty, Medicare counts up all the months between age 65 and the month you first enroll in Part B, even if you have a job with a large employer with no gaps in employment for more than eight months.

She got hit with a 20% lifetime Medicare Part B premium penalty. For every 12 months that you’re not covered by Medicare B after reaching 65 and before you enroll, the penalty is an additional 10%. And making things worse, she was hit with a Medicare Part B penalty based on the cumulative (not consecutive, which is an important difference) 25 months that she went without credible prescription drug coverage.

This is the sort of problem that does not self-resolve or get better over time. In this case, another mistake in timing is going to hurt her. She sold some assets and realized a capital gain in 2018, which increased her Modified Adjusted Gross Income (MAGI). In 2020, she’s going to have to pay the Income Related Monthly Adjustment Amount (IRMAA). If your MAGI, two years before the current year, is less than $87,000, you are exempt from IRMAA in the current year. Her cost: $1,735.20 more this year. Had she instead realized those capital gains over the course of several years, her 2018 MAGI might not have crossed the $87,000 threshold. Most people are not aware of the IRMAA and take capital gains in larger amounts than they need.

This is a harsh lesson to learn, at a time in life when there’s not a lot of flexibility or time to catch up. Talking with an estate planning lawyer about Medicare and about tax planning, as well as having an estate plan created, would have spared this woman, and countless others, from the harsh consequences of her mistakes.

Reference: Forbes (Jan. 29, 2020) “Beware Medicare’s Part B Premium Penalty And Surcharge Traps”

Spare Yourself These Retirement Expense Surprises

“’Stealth expenses,’ as one retiree described them to me, are waiting behind any number of corners in retirement.”

Learning about the common financial surprises that occur during retirement is an excellent way to try to protect nest eggs, says the article “The Expenses People Often Forget When They Plan for Retirement” from The Wall Street Journal.

A study by the Society of Actuaries found that one in five retirees and one in four widows experienced four or more financial shocks during retirement. That’s a lot of surprises for people living on fixed incomes. The good news is that the study also revealed that many older adults who experienced a stealth surprise appear to have bounced back.

Retirees are resilient, and most are good about making adjustments to their budgets to overcome their surprises. However, being prepared for these financial shocks is even better. Here are some of the more common hidden costs of retirement:

Replacement costs for big ticket items. A new furnace, a new car, or a new roof are all expenses that come up when you’re working. They don’t stop because of retirement. Many retirees underestimate their longevity and overestimate big ticket items that need replacement.

Relatives in need. This pinch can come from older parents or relatives and younger family members who find themselves in a financial crisis. An adult child who loses their job or goes through a divorce or a grandchild who needs help with tuition are some of the typical examples. Can your nest egg sustain their needs, or do you need to say no? Can other family members help?

Required distributions and taxes. Most people know that they will need to start taking withdrawals from tax-deferred accounts upon reaching 70½, but they don’t often understand the larger picture. The distribution may push the couple into a higher tax bracket, and increase Medicaid Part B premiums, which are tied to annual income.

It’s not possible to anticipate every single surprise cost that will come up during retirement. However, there are a few things that can be done. First, try to avoid any major expenditures during the first five years of retirement. That’s when nest eggs are most vulnerable to bear markets. Next, while you are saving for retirement or making budgets, include money for home repairs and upkeep.

Reference: The Wall Street Journal (Oct. 17, 2019) “The Expenses People Often Forget When They Plan for Retirement”

Death Is Very Taxing — What you Need to Know

“The personal representative (formerly executor) of the deceased’s estate may be responsible for filing a number of tax returns.”

When a person dies, their assets are gathered, their debts are paid, business affairs are settled and assets are distributed, as directed by their will. If there is no will, the intestate laws of their state will be used to determine how to distribute their assets. A big part of the process of settling an estate is dealing with taxes. A recent article from Wicked Local Westwood, titled “Five things to know about taxes after death,” explains the key things an executor or personal representative needs to know.

The Deceased Final Income Tax Returns. Yes, the dead pay taxes. The personal representative is responsible for filing the deceased final income tax return for both the year of death and prior year, if those returns have not been filed. The final income tax return includes any income earned or received by the decedent from January 1 of the year of death through the date of death. It’s common for a deceased person who is ill during the last months or year of their life to fail to file tax returns, so the executor needs to find out about the decedent’s tax status. Failure to do so, could lead to the representative being personally liable for paying those taxes.

Filing a Federal Estate Tax Return. The personal representative must file a federal estate tax return, if the value of the estate assets exceeds the federal estate tax exemption, which is $11.4 million in 2019. Even if the value of the estate does not exceed the federal estate tax exemption amount, a federal estate tax return should be filed if the decedent is survived by a spouse. This way, the deceased’s unused exemption can be used by the spouse at their death. Note that the filing deadline for the federal estate tax return is nine months after the date of death. An estate planning attorney can help with this.

Fiduciary income tax returns. A personal representative and trustee may have to file fiduciary income tax returns for an estate or a trust. The estate is a taxpayer and the representative must get a tax identification number and file a fiduciary income tax return for the estate, if income is earned on estate assets or received during the administration of the estate. A revocable trust becomes irrevocable after the death of the trust creator. A tax identification number must be obtained, and a fiduciary income tax return must be filed for any income earned by trust assets.

Estate taxes and trust taxes can become complex and confusing for people who don’t do this on a regular basis. An estate planning attorney can be a valuable resource, so that taxes are properly paid and to make the most of any tax planning opportunities for estates, trusts and their beneficiaries.

Reference: Wicked Local Westwood (Nov. 5, 2019) “Five things to know about taxes after death”

Remaining Even and Fair in Estate Distribution

“We have money in savings and retirement accounts, but our most valuable asset is our home. We want to leave our property to our two children equally.”

Treating everyone equally in estate planning can get complicated, even with the best of intentions. What if a family wants to leave their home to their daughter, who lives locally, but wants to be sure that their son, who lives far away, receives his fair share of their estate? It takes some planning, says the Davis Enterprise in the article “Keeping things even for the kids.” The most important thing to know is that if the parents want to make their distribution equitable, they can.

If the daughter takes the family home, she’ll need to have an appraisal of the home done by a certified real estate appraiser. Then, she has options. She can either pay her brother his share in cash, or she can obtain a mortgage in order to pay him.

Property taxes are another concern. The taxes vary because the amount of the tax is based on the assessed value of the real property. That is the amount of money that was paid for the property, plus certain improvements. In California, property taxes are paid to the county on one percent of the property’s “assessed value,” also known as the “base year value” along with any additional parcel taxes that have become law. The base year value increases annually by two percent every year. This was created in the 1970s, under California’s Proposition 13.

Here’s the issue: the overall increase in the value of real property has outpaced the assessed value of real property. Longtime residents who purchased a home, years ago still enjoy low taxes, while newer residents pay more. If the property changes ownership, the purchase could reset the “base year value,” and increase the taxes. However, there is an exception when the property is transferred from a parent to a child. If the child takes over ownership of the home, they will have the same adjusted base year value as their parents.

If the house is going from parents to daughter, it seems like it should be a simple matter. However, it is not. Here’s where you need an experienced estate planning attorney. If the estate planning documents say that each child should receive “equal shares” in the home, each child receives a one-half interest in the home. If the daughter takes the house and equalizes the distribution by buying out the son’s share, she can do that. However, the property tax assessor will see that acquisition of her brother’s half interest in the property as a “sibling to sibling” transfer. There is no exclusion for that. The one-half interest in the property will then be reassessed to the fair market value of the home at the time of the transfer—when the siblings inherit the property. The property tax will go up.

There may be a solution, depending upon the laws of your state. One attorney discovered that the addition of certain language to estate planning documents allowed one sibling to buy out the other sibling and maintain the parent-child exclusion from reassessment. The special language gives the child the option to purchase the property from the other. Make sure your estate planning attorney investigates this thoroughly, since the rules in your jurisdiction may be different.

Reference: Davis Enterprise (Oct. 27, 2019) “Keeping things even for the kids”

What has the Average American Saved for Retirement?

“What is the size of the average retirement nest egg? It depends on what you mean by ‘average.’"

It’s the question we all wonder about, but not very many of us will come out and ask. A 2019 analysis of more than 30 million retirement accounts by Fidelity Investments found that the average balance in corporate sponsored 401(k) plans at the end of 2018 was $95,600. When it came to traditional, Roth and rollover IRAs, the number was $98,400, reports Investopedia in a recent article titled “What Is the Size of the Average Retirement Nest Egg?” A look at 403(b) and other defined contribution retirement plans in the non-profit sector found that it was $78,7000. These numbers were down between 7.8%-8% from the same quarter of the prior year. Blame the stock market for that.

Averages like this only indicate a few things. Younger workers, for example, tend to have less in their retirement accounts than older workers. Their salaries are smaller, and they haven’t had decades to accumulate tax deferred income in their accounts. However, that gap is wide.

A June 2018 report from the Transamerica Center for Retirement Studies looked at a nationally representative sample of more than 6,000 workers and broke out retirement savings by generation. The boomer members had estimated median retirement savings of $164,000 in 2017, while Gen Xers had $72,000 and millennials had $37,000.

Aside from age, the big factors in retirement savings success seem to be education and income. People with higher income put more money into their retirement accounts. The Transamerica study shows that households with incomes of under $50,000 had estimated median retirement savings of $11,000. Households with incomes between $50,000 and $99,999 had median savings of $61,000 and those with incomes of $100,000 or more had $215,000.

The higher the level of education, the more money people have set aside for retirement.

Therefore, if you’re wondering how your nest egg compares to the average nest egg, the first thing you’ll want to do is decide to whom you want to compare yourself and your nest egg. You can compare yourself to the U.S. population in general, or to people who are more like you in education, age and income.

Here’s an unnerving thought: no matter if your nest egg is way above your peer group, that doesn’t mean it will be enough when retirement rolls around. Everyone’s situation is different, and life hands us unexpected surprises.

One way to prepare is to have an estate plan. If you don’t already have an estate plan, which includes a will, power of attorney, health care power of attorney, possibly trusts and other strategic tools for tax planning and wealth transfer, make an appointment with an estate planning attorney.

Reference: Investopedia (Sep. 24, 2019) “What Is the Size of the Average Retirement Nest Egg?”

What’s the IRS Doing about the Underpayment Penalty Threshold?

“Earlier this year, the IRS lowered the underpayment penalty threshold from 90% to 80% to help taxpayers who didn't have enough tax withheld from their paychecks in 2018 or didn't pay enough in estimated taxes last year.”

With the lowering of the underpayment penalty threshold, taxpayers could avoid the penalty this past filing season, if their 2018 withholding or estimated taxes equaled at least 80% (rather than 90%) of their 2018 tax or 100% of their 2017 tax (110% if their 2017 AGI was over $150,000).

Kiplinger’s recent article, “IRS Automatically Waives Withholding and Estimated Tax Penalty for Thousands of Taxpayers,” explains that this one-time penalty relief offering was deemed necessary, since too many taxpayers didn't adjust their 2018 withholding or estimated payments to reflect (or properly reflect) the changes made by the Tax Cuts and Jobs Act or the updated 2018 withholding tables. However, to claim the penalty relief, you had to submit IRS Form 2210 with your 2018 tax return or, if you already filed your 2018 return and paid the underpayment penalty, request a penalty refund by filing Form 843.

The IRS says there were no fewer than 400,000 taxpayers who paid at least 80% of their total federal tax liability through withholding or estimated tax payments but failed to claim the special penalty relief when they filed their 2018 tax return. However, the IRS says they won’t have to pay the underpayment penalty.

The IRS will automatically waive the penalty for these taxpayers. In the next few months, the IRS will notify affected taxpayers of this. Taxpayers who already paid the penalty will get a refund check, regardless of whether or not they previously requested a penalty refund.

If you requested an extension to file your 2018 federal tax return, you can still claim the penalty relief using Form 2210 when you file by October 15, 2019, or if you file electronically, the waiver computation will be in your tax software package.

If you want to avoid the underpayment penalty next year, you can up the amount of tax withheld from each paycheck, by giving your employer a new W-4 with fewer withholding allowances. If you're already claiming zero allowances, you can also submit a new W-4 to request that an additional amount of your choosing be withheld from each paycheck.

If you're self-employed or have other significant sources of taxable income, be certain you're paying enough each time you make a quarterly estimated tax payment.

Reference: Kiplinger (August 14, 2019) “IRS Automatically Waives Withholding and Estimated Tax Penalty for Thousands of Taxpayers”

Updated Estate Plan Can Help Your Heirs

Even if net worth is not high, a second look at your plan can be beneficial.

The Federal Tax Cut and Jobs Act is a good reason for people, regardless of the amount of their assets, to either create an estate plan or review an already existing plan, according to the Atlanta Business Chronicle in the article “Updating estate plan could save heirs in taxes.”

The tax act doubles the gift, estate and generation-skipping transfer tax (GST) exemptions, raising them to historic highs. The exemptions, which are all linked in a unified estate and gift tax, had been scheduled to increase to $5.6 million per person in 2018, but they were modified to reach the current level of $11.2 million per person, or $22.4 million per couple. The inflation-adjusted exemption for 2019 is $11.4 million per person, or $22.8 million per couple.

When the most that could be transferred to heirs was under a million dollars, everyone worried about the estate tax. Since the estate tax was so much higher than the capital gains tax, it was never considered a big deal if a person paid the capital gains tax on selling, because it was less costly than paying the estate tax.

Now with the new exemption, trying to move assets out of estates and into trusts may not be the best solution to preserve wealth and minimize taxation.

In the past, a trust would be created, and the maximum amount of funds placed into the trust for use when the grantor (the person who created the trust) died. The goal was to provide income for the spouse until the spouse’s death, at which point the money bypassed the estate and went directly to the beneficiaries, who would pay income tax on the funds.

If a person owned $10,000 worth of stock at their death, the stock increased to $100,000 and a bypass trust was in place to hold the stock, then heirs would pay taxes on $90,000 upon the sale of the stock. This could mean paying up to 30 percent in taxes, based on a 23.8 percent federal tax and the maximum state tax rate. If, however, the money went into the spouse’s estate, when the beneficiaries sold the stock, they would pay no state or federal income tax.

Note that the law creating the present $11.4 million limit ends at the end of 2025, when the tax exemption will return to $5 million (adjusted for inflation).

Another aspect of estate tax planning relates to what type of accounts inheritance spring from. For instance, heirs who receive money from Individual Retirement Accounts (IRAs) have to pay taxes when they withdraw funds from the account. IRA money is not taxed when it goes into the account, and the growth is not taxed. However, the withdrawals are.

However, because current exemption amounts may not be available after 2025, or if further changes to tax laws are made, another strategy for individuals who wish to make significant lifetime gifts, is to lock in the current levels.

 Reference: Atlanta Business Chronicle (May 31, 2019) “Updating estate plan could save heirs in taxes”

Assets Can Be Inherited but When to Receive Them?

If you receive an inheritance, it is wise to consider the impact.

There are many things that can be inherited and one must be careful of the impact on a family’s tax liability, according to the Orange Town News in “Will I Pay Taxes on My Inheritance.”

Here is a partial list of different assets and the potential impact:

Bank Savings Accounts or CDs. As long as the cash inherited is not from a retirement account, there are no federal taxes due. The IRS does not impose a federal inheritance tax. However, there are some states, including Iowa, Kentucky, Maryland, Nebraska, New Jersey and Pennsylvania, that do have an inheritance tax. Speak with an estate planning attorney about this tax.

Primary Residence or Other Real Estate. Inheriting a home is not a taxable event. However, once you take ownership and sell the home or other property, there will be taxes due on any gains. The value of the home or property is established on the day of death. If you inherit a home valued at death at $250,000 and you sell it a year later for $275,000, you’ll have to declare a long-term capital gain and pay taxes on the $25,000 gain. The cost-basis is determined, when you take ownership.

Life Insurance Proceeds. Life insurance proceeds are not taxable, nor are they reported as income by the beneficiaries. There are exceptions: if interest is earned, which can happen when receipt of the proceeds is delayed, that is reportable. The beneficiary will receive a Form 1099-INT and that interest is taxable by the state and federal tax agencies. If the proceeds from the life insurance policy are transferred to an individual as part of an arrangement before the insured’s death, they are also fully taxable.

Retirement Accounts: 401(k) and IRA. Distributions from an inherited traditional IRA are taxable, just as they are for non-inherited IRAs. Distributions from an inherited Roth IRA are not taxable, unless the Roth was established within the past five years.

There are some changes coming to retirement accounts because of pending legislation, so it will be important to check on this with your estate planning attorney. Inherited 401(k) plans are or eventually will be taxable, but the tax rate depends upon the rules of the 401(k) plan. Many 401(k) plans require a lump-sum distribution upon the death of the owner. The surviving spouse is permitted to roll the 401(k) into an IRA, but if the beneficiary is not a spouse, they may have to take the lump-sum payment and pay the resulting taxes.

Stocks. Generally, when stocks or funds are sold, capital gains taxes are paid on any gains that occurred during the period of ownership. When stock is inherited, the cost basis is based on the fair market value of the stock or fund at the date of death.

Artwork and Jewelry. Collectibles, artwork, or jewelry that is inherited and sold, will incur a tax on the net gain of the sale. There is a 28% capital gains tax rate, compared to a 15% to 20% capital gains tax rate that applies to most capital assets. The value is based on the value at the date of death or the alternate valuation date. This asset class includes anything that is considered an item worth collecting: rare stamps, books, fine art, antiques, and coin collections fall into this category.

An estate planning attorney can advise you on creating an estate plan that fits your unique circumstances, as well as advising you on when to accept an inheritance.

Reference: Orange Town News (May 29, 2019) “Will I Pay Taxes on My Inheritance”

Trusts are Often Key to Estate Planning

There are many trusts and they fall into two categories.

Estate planning has many options to achieve various purposes and trusts are one of the key ways to accomplish those goals, according to the Aiken Standard in “ON THE MONEY: A look at different types of trusts.”

Some are created by the operation of a will. They are known as testamentary trusts—meaning that they came to be via the last will and testament. Another way to view trusts is in two categories: revocable or irrevocable. As the names imply, the revocable trust can be changed, and the irrevocable trust usually cannot be changed.

A testamentary trust is a revocable trust, since it may be changed during the life of the grantor. However, upon the death of the grantor, it becomes irrevocable.

In most instances, a revocable trust is managed for the benefit of the grantor, although the grantor also retains important rights over the trust during her or his lifetime. The rights of the grantor include the ability to instruct the trustee to distribute any of the assets in the trust to someone, the right to make changes to the trust and the right to terminate the trust at any time.

If the grantor becomes incapacitated, however, and cannot manage her or his finances, then the provisions in the trust document usually give the trustee the power to make discretionary distributions of income and principal to the grantor and, depending upon how the trust is created, to the grantor’s family.

Note that distributions from a living trust to a beneficiary other than the grantor, may be subject to gift taxes. Those are paid by the grantor. In 2019, the annual gift tax exclusion is $15,000. Therefore, if the distribution is under that level, no gift taxes need to be filed or paid.

When the grantor dies, the trust property is distributed to beneficiaries, as directed by the trust agreement.

Irrevocable trusts are established by a grantor and cannot be amended without the approval of the trustee and the beneficiaries of the trust. The major reason for creating such a trust in the past was to create estate and income tax advantages. However, the increase in the federal estate tax exemption means that a single individual’s estate won’t have to pay taxes, if the value of their assets is less than $11.4 million ($22.8 million for a married couple).

Once an irrevocable trust is established and assets are placed in it, those assets are not part of the grantor’s taxable estate, and trust earnings are not reported as income to the grantor.

The downside of an irrevocable trust is that the transfer of assets into the trust may be subject to gift taxes, if the amount that is transferred is greater than $15,000 multiplied by the number of trust beneficiaries. However, depending upon the size of the grantor’s estate, larger amounts may be transferred into an irrevocable trust without any gift tax liability to the grantor, if the synchronization between gift taxes and estate taxes is properly done. This is a complex strategy that requires an experienced trust and estate attorney.

Trusts are also used to address charitable giving and generating current income. These trusts are known as Charitable Remainder Trusts and are irrevocable in nature. There is a current beneficiary who is either the donor or another named individual and a remainder beneficiary, which is a qualified charitable organization. The trust document provides that the named beneficiary receives an income stream from the income produced by the trust assets, and when the grantor dies, the remaining assets of the trust pass to the charity.

An estate planning attorney can advise you on creating an estate plan that fits your unique circumstances and may include one or more trusts.

Reference: Aiken Standard (May 17, 2019) “ON THE MONEY: A look at different types of trusts”

Some Creditors Can Garnish Your Social Security

The IRS and those holding your school loans can take aim at your benefits.

You have worked your whole working life for Social Security in your retirement and it is relatively safe from creditors, with a few exceptions, according to Yahoo! Finance in “Can Creditors Come After Your Social Security Benefits.”

Personal loan payments, credit card payments, or medical bills are usually not able to take your Social Security benefits. However, there are some exceptions you’ll need to know about:

• The IRS will not blink at taking up to 15% of your benefits, if your taxes are not paid.
• If you owe on student loans, the loan companies can come after your Social Security benefits, even if the debt is decades old.
• The same is true if you are behind on either child support or alimony payments.

As long as your outstanding debt is not tax-related, the first $750 of your benefits is protected from being garnished. However, if you’re behind on child support or alimony, you could lose more than 50% of those benefits.

There are steps to take if debt is an issue. First, if you owe money to the IRS, contact the local IRS office to work out a payment plan. They will almost always work with people to reach an agreement on an installment payment plan. This will avoid having your benefits garnished.

If you’re behind on student loan payments, reach out to the lender and work out an arrangement. If you can prove that your financial situation is dire, you might be able to come up with a deferred payment plan or change the repayment schedule.

If things are really bad, consider filing for bankruptcy. If you do, realize that not all your debt will be dischargeable, including the IRS and school loans.

This might be a situation where a bankruptcy attorney or a debt settlement firm is needed. Be very cautious about working with a debt settlement firm, to be sure that they are credible and trustworthy. The firm or the attorney will be able to help negotiate the debts. Remember that the ultimate goal of any creditor is to get paid, and sometimes getting paid half is better than not being paid at all.

Reference: Yahoo! Finance (April 27, 2019) “Can Creditors Come After Your Social Security Benefits”