IRS Form 56

In the next decade, over one fourth of the population is expected to have dementia and/or Alzheimer's. After age 65, one out of two of us will be afflicted.

Most of us will have to help our parents or our spouse by filing their tax return and maybe even handling an IRS audit. But, the IRS is not allowed to disclose information to anyone other than the taxpayer.

Like us, the IRS staff have parents and concerns regarding them, so they came up with a solution that does not need the approval of the grid-locked Congress.

The IRS had its attorneys issue a legal memo stating that the simple Form 56 solves the problem. If your parents file a Form 56 naming you as their agent, then you can handle their IRS tax matters. Form 56 is short and simple.

One thing to keep in mind is to be sure that your parent signs Form 56 before they lose their mental capacity.

To see Form 56, go to: http://www.irs.gov/pub/irs-pdf/f56.pdf

Retirement Plans and Government Benefit Eligibility - Part 2

People with disabilities often need help from government benefit programs that provide monthly income, medical care, attendant care, housing and food. Many of these programs, including Medicaid, Supplemental Security Income (SSI) and food stamps, are means-tested. These programs count the amount of an applicant's monthly income and also the applicant's resources (bank accounts, stocks, retirement plans, and other assets) in determining eligibility for benefits.

For those individuals with disabilities who have worked and accumulated money in a retirement plan, how will those plans be treated when it comes time to apply for benefits? If a parent wants to name a child with disabilities as a beneficiary of the parent's retirement plan, how will that affect the child's elgibility for benefits? If a child is offered a retirement plan as part of her employment benefit package in a supported work opportunity, how will that affect her current or future eligibility for benefits?

In almost all cases a retirement plan inherited outright by a person with disabilities will be treated as an available asset or as monthly income that will reduce or eliminate means-tested government benefits, including SSI, Medicaid and food stamps. The fact that the retirement plan is taxable as funds are withdrawn does not mean it will not affect eligibility for needs-based benefits.

For example: If Sam inherits a $100,000 IRA from his mother at her death, that IRA account exceeds the $2,000 Medicaid and SSI asset limit and will disqualify him from those benefits. There are planning opportunities available to Sam's mother to avoid this result but still protect the retirement plan for Sam's benefit.

If the retirement plan is owned by the individual with disabilities, the effect of the plan on government benefits is more complicated. The government benefit program will need to determine if the retirement plan, or any portion of the plan, can be accessed by the individual. In other words, are the plan's assets available to the individual? This issue of availability will vary from plan to plan, and some state Medicaid rules may vary on how availability is determined.

In most cases, if the plan owner is no longer working, the retirement plan will be available and counted as a resource. If the plan owner is still working, the retirement plan may prohibit the owner from withdrawing funds from the plan while employed. In that case the plan should not be counted as an available asset. If the retirement plan allows a hardship waiver of the prohibition on withdrawing from the plan or the option of borrowing against the account, then the plan may be counted as an available asset depending upon how the plan defines "hardship" or under what circumstances employees can borrow again their account.

In some cases, the retirement plan may be treated as monthly income rather than an asset if the plan has been converted from a lump sum to irrevocable periodic payments from the plan over the life expectancy of the plan owner. Income usually reduces or offsets means-tested government benefits, so having a retirement plan treated as income rather than an asset probably will not help. Again, if Sam inherits a $500 per month IRA annuity from his mother at her death, the $500 will offset and reduce his SSI income dollar for dollar (other than $20 that will be disregarded). Instead of receiving his SSI income of $674 plus $500, Sam will receive $500 from the inherited IRA and $194 from the SSI program for total monthly income of $694.

The rules governing the treatment of retirement plans vary depending upon the source of the retirement plan and may vary from state to state. Individuals with retirement plan assets should seek legal advice before applying for means-tested government benefits.

Retirement Accounts and Government Benefits - Part 1

For many individuals retirement plans are an important part of their financial security. While retirement plans can be great wealth building tools, they can also present some significant challenges if an individual with disabilities needs to qualify for some government benefits.

Retirement plans can be an issue in several different contexts. Parents often want to leave retirement accounts to their children with disabilities as part of their estate plan. People with disabilities may have their own retirement plan that was funded before the onset of their disability. In some cases a person with disabilities may have employment through a PASS Plan or a supported job opportunity that includes either employer funding of a retirement plan or the employee’s option to self-fund a retirement plan through wage deferral or withholding. In each of these cases it is important to know how retirement plans can affect eligibility for government benefits and what options are available to minimize or avoid the loss or reduction in benefits.

We will discuss how retirement plans may affect eligibility for means-tested government benefits in two parts. In a future newsletter, we will address options to shelter retirement plan benefits in order to preserve needed government benefits.

What is a Retirement Plan?

While there are many different types of retirement plans, the following are the most common plans:
• Individual Retirement Accounts (IRAs). IRAs are retirement accounts that are owned and funded by individuals with income they have earned through employment.
• 401(k) Plans. 401(k) plans are employer sponsored retirement plans that are funded by an employee’s salary deferral and in some cases also by employer contributions. 401(k) plans are typically offered by private and corporate employers.
• 403(b) Plans. 403(b) plans function essentially the same way as 401(k) plans. They are retirement plans that are administered the employees of educational institutions, hospitals and municipalities.

Generally speaking, each of these plans defers income taxes. This means that money you put into the plan is not taxable in the year of contribution, and it grows tax free within the plan. But when you withdraw funds from one of these plans, the amount withdrawn is considered taxable income, just like wages. Thus the tax is deferred but not avoided altogether.

There are rules which govern the manner and timing of withdrawals from these plans. These rules are designed to encourage people to save for their retirement, and then use the money once they do retire. The two most important rules for our purposes are as follows:

• Rule 1. Prior to reaching age 59 ½ , a retirement plan owner who withdraws funds from his or her retirement plan will be subject to an excise tax (like a penalty) equivalent to 10% of the total distribution. This is in addition to the ordinary income tax that applies to the distribution. This rule is designed to encourage people to keep money in the plan until they retire. There are some exceptions to this rule, however, the most important of which allows a person with a recognized disability to withdraw funds from a retirement plan before age 59 ½ without incurring the 10% excise tax penalty.
• Rule 2. Once an individual reaches the age of 70 ½, the individual must begin taking required minimum distributions from the retirement plan. The IRS has a special life expectancy table that is used to calculate one’s required minimum distributions. If the individual fails to take a minimum distribution after reaching age 70 ½ , then there will be a 50% excise tax on the total amount of the required distribution. That excise tax is in addition to the ordinary income tax payable on the distribution. This rule is designed to encourage people to use the money when they retire.

Source: www.specialneedsalliance.com; 9/10 - Vol. 4, Issue 14

Your Retirement Age Can Affect Your Child's Disability Benefits

If you have a child with special needs, you should think carefully about whether it is advisable to retire before what Social Security calls your “normal retirement age” or “NRA.” Social Security has a formula for reducing retirement benefits depending upon how many years before NRA a worker retires (but not younger than age 62). NRA varies between age 65 and 67 depending on the worker’s date of birth. Social Security has a chart showing retirement ages. The NRA has gradually increased over time. For many years NRA was 65 for everyone, but now it is as high as 67 for people born after 1959.

If you retire before your NRA, your Social Security benefit amount will be reduced by a mathematical formula based on how many months before your NRA you retire. So for example, if you retired at age 62 and your NRA was 66, your retirement income will be reduced by 25%. If you retired 2 years before your NRA, the reduction in your Social Security benefits would be about 13%. You can calculate your estimated NRA by going to Social Security’s web site. AnalyzeNow, a private web site with a mission to “disseminate inexpensive retirement planning tools,” also has a useful retirement calculator program.

There are several articles on the pros and cons of applying for Social Security retirement benefits before reaching your NRA. Many of the articles discuss what is referred to as the “break even” point. The idea is to try to calculate whether you will receive more money over your lifetime if you receive a smaller amount starting at age 62 or a larger amount starting at a later age. There are calculator programs to determine how long you would have to live before the amount you would receive at the NRA rate would be greater than the smaller amount you would receive over a longer period of time if you elected early retirement.

These articles and calculators fail to take into account one factor that is of critical importance to parents with a special needs child. Your child may be eligible for a Social Security benefit that is based on your retirement benefit. The less you receive in retirement income, the less your child’s benefit will be for his or her lifetime.

Child Disability Benefits

If a child is disabled before the age of 22, he or she may be eligible for Child Disability Benefits (CDB) when the parent retires, becomes disabled or dies. The child must be at least 18 years old, and the parent must have paid into the Social Security system while working. (A detailed discussion of CDB is beyond the scope of this article.) The child’s benefit amount is 50% of the parent’s Social Security benefit if the parent is living. If the parent dies, the CDB benefit is increased to 75% of the parent’s benefit amount. If both parents are retired, disabled or deceased, the child will receive the CDB amount based on the higher earning parent’s Social Security benefit. Occasionally a child will not get the full CDB benefit amount because other family members are also entitled to Social Security benefits based upon the parent’s account. There is a maximum “family benefit” that can be paid based on any one person’s Social Security contributions.

Many adult disabled children are already receiving SSI benefits when they qualify for CDB after their parent retires, becomes disabled or dies. CDB will replace or offset the SSI benefit dollar for dollar. If the CDB amount is less than the SSI benefit amount, the child can receive both CDB and enough SSI income to bring the child’s total income up to the SSI benefit amount plus an additional $20.

The federal SSI benefit amount for 2010 is $674. Some states pay a supplemental amount to increase the total SSI payment. So, for example, if Tim was previously receiving SSI and his CDB benefit is $600 per month, he will be eligible for an additional SSI benefit of $94 per month ($74 + $20). If Tim’s CDB benefit is $800 per month, he will receive no SSI benefits because the CDB amount exceeds the SSI benefit amount.

How Retirement Age Affects Child Disability Benefits

The CDB amount paid to your child is based upon your actual Social Security benefit amount. Applying for early retirement Social Security benefits will not only reduce your Social Security benefit amount for the rest of your life, but it will also reduce your child’s CDB benefit.

For example, Kate is 61 years old and is trying to decide whether to take early retirement at age 62 or wait until her NRA at 66. Kate has a 30 year old son, Scott, who is currently receiving SSI benefits of $674 per month. Scott has had cerebral palsy since birth.

Using the Social Security benefit calculator, Kate determined that her NRA is 66, because she was born in 1949, and that if she waited until age 66 to retire, her monthly benefit would be $1250 per month. If she retired at age 62, her retirement benefit would be about $900 per month.
Based upon the above estimates, Kate then calculated Scott’s CDB if she died. Scott would be entitled to half of Kate’s benefit amount when she retires, but her primary concern is how to provide for her son at her death. If Kate waited until her NRA of 66, Scott’s CDB would be $937 per month (75% of $1250). If Kate instead retired at 62, she estimated that Scott’s CDB benefit would be $675 per month (75% of $900). In doing these rough calculations, Kate did not take into account annual cost of living adjustments (COLA) and she disregarded the CDB benefits Scott would not receive if she delayed her retirement by four years.

The difference in Scott’s CDB amount depending upon whether Kate retired at age 62 or 66 amounted to $262 per month or $3144 per year. Projecting out this increased benefit amount over 40 years, Scott would receive approximately $125,000 more in CDB income if Kate waited to apply for Social Security at 66 when she reaches her NRA. Keep in mind that the above projections are based upon Kate’s employment history, so the projected CDB benefits for her son will not be the same as another parent with higher or lower earnings.

There are many factors to take into account before deciding when to apply for Social Security retirement benefits, and there is no single right answer to the question, “is early retirement a good idea?”

• For some families there are economic, health or employment issues that make early retirement necessary regardless of the impact on a child’s CDB amount.
• For some families there are significant assets to leave to their children in a special needs trust, making additional monthly income from delayed retirement less significant.
• Some children contribute almost all of their income as a co-payment towards residential care paid by the Medicaid program, so additional monthly income will not impact the quality of their life.
• Some children with disabilities have their own employment history through supported work that gives them a higher disability benefit than what they would receive on a parent’s Social Security account.
• The child is entitled to the higher benefit amount if both parents are deceased, retired or disabled and in insured status with Social Security. For example, if Scott’s father has an account with Social Security that is close to or higher than Kate’s, she may be less concerned about the effect of her retirement age on Scott’s CDB benefit amount.



All of the above factors should be weighed carefully before you decide whether to apply for early retirement with Social Security. Your financial planner can give you guidance on the best age for you to retire based upon your net worth. But if you have a special needs child who was disabled before the age of 22, no decision should be made before considering the impact of your retirement age on your child’s future Social Security benefits.

Source: www.specialneedsalliance.com, July 2010 - Vol. 4, Issue 11

MEDICARE REFORM MEANS SOME SENIORS FACE BENEFIT CUTS

First, the good news: According to a report released by the White House on Monday, America’s new health reform law will generate $575 billion in Medicare cost savings over the next decade, allowing the program to survive until 2029. The report says this will result in lower Medicare premiums of nearly $200 a year by 2018.

Part of those savings, amounting to $5.3 billion by 2011, will come from reduced “overpayments” to Medicare Advantage, a system that allows Medicare recipients to receive benefits via private health insurance providers. The savings associated with Medicare Advantage efficiencies will rise to $145 billion by 2019.

Now for the bad news: Seniors enrolled in Medicare Advantage may soon find that their benefits have been cut. Under changes contained within America’s new health reform law, reduced payments to private insurers may lead to a reduction in benefits such as dental coverage and free eyeglasses. That could trigger an exodus from Medicare Advantage plans back to traditional fee-for-service Medicare, though at much higher costs.

Shrinking the Subsidies
Since 2003, when the subsidies offered Medicare Advantage were greatly increased, the number of enrollees in such plans – which are offered by a number of private insurance companies – has soared. Roughly one in four Medicare recipients is now on a Medicare Advantage plan because of all the extra benefits that were offered.

The issue has become a central concern to many seniors, because the health reform law passed in March makes deep cuts in the subsidy payments Medicare makes to private Medicare Advantage plans. The Obama administration report says Medicare paid Medicare Advantage plans 14%, or $1,000 per person on average, more for health services than traditional Medicare, with “no measured differences in health outcomes.” It is those extra payments that will now be eliminated.

Yet in one change to the rules which has not been widely reported, people enrolled in a Medicare Advantage plan will no longer be able to switch to another Medicare Advantage program. Instead, they will have no option but to join the traditional Medicare program if they decide to leave their current plans because benefits have been reduced under the new law.

Peter Ashkenaz, deputy director of media affairs at the U.S. Health and Human Services department of Medicare and Medicaid services, confirmed that as of Jan. 1, people enrolled in Medicare Advantage will have 45 days of open enrollment “to return to the fee-for-service program.” But, he added, users will not be able to switch to another Medicare Advantage plan, as they have been able to do for the past decade.

The Challenge of Change
“Obviously if you’re taking away subsidies, then companies that provide Medicare Advantage’ plans will have to review what they are doing,” says David Certner, legislative director for AARP. “We’re likely to see some changes in some of the plans.”

AARP, which supported the health care reform law, also offers Medicare Advantage and Medigap insurance policies to its members. Certner says AARP’s position is that its business side should conform to its policy side, and “that we needed to reduce some of these excess payments, but our plans would continue to operate in whatever the regime was.”

Certner says the savings outlined by the Administration means the “financial solvency of Medicare is going to be improved by 12 years – that’s pretty significant.”

But, he added, there are concerns that projected savings in payments to health care providers like hospitals and nursing homes might limit access to those facilities. “Those are not likely to happen as much in the near term, “ but over longer periods of time they might have an impact, and “that’s certainly something we’ll be keeping our eyes on.”

Mind the Gaps
Joseph Antos, a health care scholar at the American Enterprise Institute, says this change could prove extremely costly to retirees. That’s because most seniors on Medicare Advantage don’t have so-called Medigap policies, which are private insurance plans that pay the “gaps” in traditional Medicare coverage such as hospital deductibles and doctor co-payments.

Antos says that when patients switch from Medicare Advantage to traditional Medicare, “they will pay much higher premiums than they ever imagined possible for Medigap insurance.” The reason is that most people take out Medigap coverage when they turn 65 and are healthy, while those who are older and in poorer health will now have to pay much more.

Antos said that based on the analysis of Richard S. Foster, the chief actuary of the Medicare service, some large hospitals and nursing homes may withdraw from providing Medicare services because the reimbursements are too low to be cost-effective.

Source: www.dailyfinance.com, Charles Wallace, 8/3/10

Senators Move to Revive Estate Tax at Reduced Rate

WASHINGTON – The federal estate tax would be revived, but at a reduced rate, under a plan being pushed by two senators, a Democrat and a Republican.

Democrat Blanche Lincoln of Arkansas and Republican Jon Kyl of Arizona hope to attach the new estate tax to a small business lending bill pending in the Senate. Their bill would set the top estate tax rate at 35 percent, with a per-person exemption of $5 million, indexed to inflation.

In 2009, the top estate tax rate was 45 percent with a per-person exemption of $3.5 million. Congress allowed the estate tax to expire this year, but it is scheduled to come back next year with a top rate of 55 percent, unless Congress acts.

"It's time to take decisive action on the estate tax, and provide the permanent solution that Arkansas' hardworking farmers and small businesses are desperately seeking," Lincoln said.

The Senate, as part of a nonbinding budget resolution, voted last year in favor of a proposal similar to the one pushed by Lincoln and Kyl. The House, however, voted to extend the 2009 rates, and the two sides were unable to reach an agreement.

The Senate is expected to take up the small business lending bill next week, though leaders have not indicated whether they will allow a vote on the estate tax as part of the debate.

"If the Small Business Lending bill is intended to help small business create jobs, wouldn't it make sense to provide small business owners with the certainty that their tax rates aren't going to skyrocket at the beginning of next year?" Kyl said.

"Legacy for One Billionaire: Death but no Taxes"

The following article is reprinted from www.msnbc.msn and originally appeared in the New York Times on Wednesday, June 9, 2010. It is entitled, “Billionaire’s legacy – death, but no taxes”.

Earlier this year, we released information regarding the unique situation that would occur in 2010 regarding the estate tax laws. In addition, we held several client seminars in an effort to explain the consequences of this repeal. This article illustrates how the estate tax changes for 2010 effect an estate and we’d like to share it with you.

A Texas pipeline tycoon who died two months ago may become the first American billionaire allowed to pass his fortune to his children and grandchildren tax-free.

Dan L. Duncan, a soft-spoken farm boy who started with $10,000 and two propane trucks, and built a network of natural gas processing plants and pipelines that made him the richest person in Houston, died in late March of a brain hemorrhage at 77.

Had his life ended three months earlier, Mr. Duncan’s riches – Forbes magazine estimated his worth at $9 billion, ranking him as the 74th wealthiest in the world – would have been subject to a federal tax of at least 45 percent. If he had lived past January 1, 2011, the rate would be even higher – 55 percent.

Instead, because Congress allowed the tax to lapse for one year and gave all estates a free pass in 2010, Mr. Duncan’s four children and four grandchildren stand to collect billions that in any other year would have gone to the Treasury.

The United States enacted an estate tax in 1916, and when John D. Rockefeller, America’s first billionaire, died in 1937, his estate paid 70 percent. Since then, the rates have fluctuated, but this is the first time the tax has been repealed altogether.

The bonanza in tax savings for Mr. Duncan’s descendants is sure to be unsettling to those who have paid estate taxes on more modest wealth – until January 1 of this year, it applied to any estate valued at more than $3.5 million, taxing only the money exceeding that threshold, or $7 million for a couple’s estate.

Incendiary issue
Although the tax affects only about 5,500 estates a year, it is such an incendiary issue that when Congress unexpectedly let it lapse at the end of 2009, financial advisers warned that it might play a macabre factor in the end-of-life decisions being weighed by heirs of elderly Americans. Some estate lawyers worried that tax considerations might prompt their clients to keep an ill relative on life support through the end of 2009 to get the favorable treatment – or worse, resist life-prolonging measures to hasten a relatives demise before the end of 2010.

The one-year lapse in the estate tax was signed into law by President George W. Bush in 2001, an accounting quirk in his package of tax cuts. Although Democrats pledged to close that gap and reinstate a tax for 2010 when they took control of Congress, they failed to reach an agreement last December. The Senate Finance Committee is not trying to forge a compromise that would reinstate the tax, but even if that effort succeeds, it is unclear whether any changes might be retroactive and applied to those who have died so far in 2010.

Many lawyers say Mr. Duncan’s heirs have the means and motivation to wage a fierce court battle to challenge the constitutionality of any retroactive tax.

Representatives of Mr. Duncan’s family, his estate and his business interests did not return calls about the matter. Mr. Duncan’s will, which is on file at the Harris County Probate Court in Houston, was written in 2006 and amended in 2008, a time when most estate planners assumed that Congress would not allow the tax to lapse. Federal law has long allowed an unlimited amount of assets to pass untaxed to a surviving spouse, and Mr. Duncan left his home and ranch to his wife of more than 20 years, Jan, along with stock valued at hundreds of millions of dollars.

But the bulk of his estate is left to his children and grandchildren, and would have been taxable in 2009 or 2011.

5,000-acre hunting ranch
In addition to personal effects bequeathed to his descendants – boats, jewelry, automobiles, shotguns and a 5,500-acre Texas hunting ranch stocked with wild game – he passed on his holdings in EPCO and Dan Duncan L.L.P., two entities in the natural gas and pipeline empire he built. The stock involved includes more than 100 million shares in Enterprise GP Holdings, which closed at $43.23 the last trading day before Mr. Duncan died. That asset alone could have resulted in a $2 billion estate tax.

The Treasury collected more than $25 billion in estate taxes in 2008, the most recent year for which data is available.

Elaborate estate plans with sophisticated trusts are often made many years before death to reduce estate taxes owed by the richest.

Advocates of the tax say it is unconscionable that Congressional leaders have allowed the richest Americans to reap a new tax break at a time when deficits are soaring and the income gap between wealthy and poor citizens remains near historic levels.

“The ultrawealthy in this country will still be able to pass on enormous wealth to the next generation,” said Chuck Collins, who studies income inequality and has worked with billionaires like Warren E. Buffet and Bill Gates to promote an estate tax. Mr. Collins argues that the tax is a “recycling program for economic opportunity.”

But opponents, who label it a death tax, say it is unfair because it taxes the same income twice – once when it is earned and again when it is passed on to heirs.

Mr. Duncan’s eldest daughter, Randa Duncan Williams, is serving as executor of the estate and is a voting member of the family trust that will now control her father’s interest in Enterprise GP Holdings.

Should the family trust sell these inherited shares, capital gains taxes would presumably be owed on the difference between Mr. Duncan’s original cost, which could be quite low, and their market value when sold. Capital gains taxes are capped at 15 percent.

Ms. Williams, who has served as a director and general partner at the family’s energy businesses for years, was deeply involved in her father’s philanthropic efforts and is expected to continue much of that charitable work.

During his life, Mr. Duncan contributed to a wide assortment of wildlife foundations and community institutions like the Houston Zoo and Houston Museum of Science, and an assortment of medical institutions. The various medical centers at Baylor College of Medicine received more than $250 million from Mr. Duncan and his wife, with more than $100 million used to found the Dan L. Duncan Cancer Center.

Mr. Duncan’s will designates a handful of nonprofit groups and charitable foundations that will receive donations, all of which would have been tax-exempt even in years when the estate tax was in effect.

An avid big game hunter – Mr. Duncan has more than 500 entries in the Safari Club International record book for killing animals including polar bears, rhinoceroses, bighorn sheep, lions and elephants – he made a $1 million donation in his will to the Shikar Safari Club International Foundation.

The will also directs that any money or assets not otherwise specified for a relative or charity be deposited into two family charitable trusts, which can be used to donate to causes deemed worthy by his heirs.