The new Estate Tax law may create complications for middle class married couples: The recently enacted Tax Relief Act of 2010 brings back the federal estate tax with a whimper not a bang. But one provision, intended to help married couples, may result in new tax complexities and expense for those of even very modest wealth.
Under the new rules, individuals who die in 2011 or 2012 will have an exemption amount of $5 million dollars (reduced if they made large gifts during lifetime). If their taxable estate does not consume the entire $5 million exemption, the unused portion can be passed on to their surviving spouse. However, the unused exemption amount is available to the surviving spouse only if an election is made and the amount is calculated on a timely filed estate tax return of the deceased spouse. This estate tax return must be filed to pass on the unused exemption even if no return is otherwise required.
In its December 10th technical explanation of the provisions of the law, the Congressional Joint Committee on Taxation gives the following example of how this "portability" provision will work:
"Example 1: Assume that Husband 1 dies in 2011, having made taxable transfers of $3 million and having no taxable estate. An election is made on Husband 1's estate tax return to permit Wife to use Husband 1's deceased spousal unused exclusion amount. As of Husband 1's death, Wife has made no taxable gifts. Thereafter, Wife's applicable exclusion amount is $7 million (her $5 million basic exclusion amount plus $2 million deceased spousal unused exclusion amount from Husband 1), which she may use for lifetime gifts or for transfers at death."
In the Joint Committee example, it is pretty obvious that the relatively wealthy surviving spouse should hire a lawyer to prepare a federal estate tax return for her deceased husband. At a 35% tax rate, the unused $2 million dollar exemption could someday be worth $700,000 to her heirs.
But doesn't this same logic hold true in the situation of a married couple with a much more modest net worth? Who knows what the future holds for the surviving spouse.
Assume that you are the lawyer meeting with a surviving spouse soon after the death of her husband. The deceased had an "I love you" estate plan which leaves everything to his wife. The value of his estate, for federal estate tax purposes, is $400,000. There is no federal (or state) tax and there is no requirement that a federal estate tax return be filed.
But there is a $5 million dollar unused exemption that can be passed on to the surviving spouse -- IF your client is willing to go to the hassle and expense of having an estate tax return prepared and filed. As the lawyer, how can you not suggest the filing of estate return to calculate the unused exclusion and elect to pass it on? How can you guarantee that the unused exclusion will not someday be incredibly valuable to your client's children or other heirs? At 35% tax rate, an unused $5 million exclusion could someday be worth as much as $1.75 million dollars.
Note that the more modest the estate of the deceased spouse, the more potentially valuable the unused exemption.
Also consider that surviving spouses can acquire unanticipated wealth as a result of fluctuating real estate values as an example.
As a lawyer, I don't want to find myself sitting across the table from my client's children someday trying to explain why a million dollars in avoidable federal estate taxes is due because mom didn't file an estate tax return when dad died. I'm not sure I would feel that much better even if I had some kind of a wavier signed by mom.
So, it seems to me that the portability provision in Title III of the new Tax Relief Act may be the proverbial wolf in sheep's clothing. It may create a lot of additional work for lawyers, and expense for widowed estate administration clients of only modest net worth.
Source: Jeffrey A. Marshall, Certified Elder Law Attorney, 12/19/10.
Thursday, December 23, 2010
Monday, December 20, 2010
House Sends Tax-Cut Compromise to President
A massive bipartisan tax package preventing a big New Year's Day tax hike for millions of Americans is on its way to President Obama for his signature.
The measure would extend tax cuts for families at every income level, renew jobless benefits for the long-term unemployed and enact a new one-year cut in Social Security taxes that would benefit nearly every worker who earns a wage.
In a remarkable show of bipartisanship, the House gave final approval to the measure just before midnight Thursday, overcoming an attempt by rebellious Democrats who wanted to impose a higher estate tax than the one Obama agreed to.
The vote was 277-148, with each party contributing an almost identical number of votes in favor (the Democrats, 139 and the Republicans, 138). Opposed were 112 Democrats and 36 Republicans.
NBC News reported that Obama was set to sign the bill and make a statement on Friday afternoon.
In a rare reach across party lines, Obama negotiated the $858 billion package with Senate Republicans. The White House then spent the past 10 days persuading congressional Democrats to go along, providing a possible blueprint for the next two years, when Republicans will control the House and hold more seats in the Senate.
"There probably is nobody on this floor who likes this bill," said House Majority Leader Steny Hoyer, D-Md. "The judgment is, is it better than doing nothing? Some of the business groups believe it will help. I hope they're right."
'Good for Growth'
Sweeping tax cuts enacted when George W. Bush was president are scheduled to expire Jan. 1 -- a little more than two weeks away. The bill extends them for two years, placing the issue squarely in the middle of the next presidential election, in 2012.
The extended tax cuts include lower rates for the rich, the middle class and the working poor, a $1,000-per-child tax credit, tax breaks for college students and lower taxes on capital gains and dividends. The bill also extends through 2011, a series of business tax breaks designed to encourage investment that expired at the end of 2009.
Workers' Social Security taxes would be cut by nearly a third, going from 6.2 percent to 4.2 percent, for 2011. A worker making $50,000 in wages would save $1,000; one making $100,000 would save $2,000.
"This legislation is good for growth, good for jobs, good for working and middle class families, and good for businesses looking to invest and expand their work force," said Treasury Secretary Timothy Geithner.
Some Democrats complained that the package is too generous to the wealthy; Republicans complained that it doesn't make all the tax cuts permanent.
Obama talks tax cuts, business investment
Rep. Ginny Brown-Waite, R-Fla., called it "a bipartisan moment of clarity."
The bill's cost, $858 billion, would be added to the deficit, a sore spot among budget hawks in both parties.
"I know that we are going to borrow every nickel in this bill," Hoyer lamented.
At the insistence of Republicans, the plan includes an estate tax that would allow the first $10 million of a couple's estate to pass to heirs without taxation. The balance would be subject to a 35 percent tax rate.
Many House Democrats wanted a higher estate tax, one that would allow couples to pass only $7 million tax-free, taxing anything above that amount at a 45 percent rate. They argued that the higher estate tax would affect only 6,600 of the wealthiest estates in 2011 and would save $23 billion over two years.
House Speaker Nancy Pelosi, D-Calif., called the estate tax the "most egregious provision" in the bill and held a vote that would have imposed the higher estate tax. It failed, 194 - 233.
No Pelosi vote
On the bill's final vote, House Speaker Nancy Pelosi, D-Calif., did not vote; House GOP leader John Boehner, R-Ohio, and Majority Leader Steny Hoyer, D-Md., voted for the bill, and Majority Whip James Clyburn, D-SC, voted against the bill, NBC News reported.
Boehner, after the vote, called the bill's passage "critically important."
"Stopping all the tax hikes is a good first step in our efforts to reduce the uncertainty family-owned small businesses are facing, but much more needs to be done, including cutting spending, permanently eliminating the threat of job-killing tax hikes, and repealing the job-killing health care law," Boehner, House speaker-designate, said in a prepared statement.
House Republicans who will move into powerful posts when the GOP takes control in January urged passage of the bill.
Rep. Eric Cantor of Virginia, in line to become majority leader, said the measure, while not perfect, marked a "first step" toward economic recovery.
Largely marginalized in the negotiations leading to the bill, Democrats emphasized their unhappiness with Obama.
"We stand today with only one choice: Pay the ransom now or pay more ransom later," said Rep. Brad Sherman of California. "This is not a place Democrats want to be. But, ultimately, it is better to pay the ransom today than to watch the president pay even more, and I think he'd be willing to pay a bit more next month."
Source: NBC News and The Associated Press contibuting to msnbc.com, 12/17/10.
The measure would extend tax cuts for families at every income level, renew jobless benefits for the long-term unemployed and enact a new one-year cut in Social Security taxes that would benefit nearly every worker who earns a wage.
In a remarkable show of bipartisanship, the House gave final approval to the measure just before midnight Thursday, overcoming an attempt by rebellious Democrats who wanted to impose a higher estate tax than the one Obama agreed to.
The vote was 277-148, with each party contributing an almost identical number of votes in favor (the Democrats, 139 and the Republicans, 138). Opposed were 112 Democrats and 36 Republicans.
NBC News reported that Obama was set to sign the bill and make a statement on Friday afternoon.
In a rare reach across party lines, Obama negotiated the $858 billion package with Senate Republicans. The White House then spent the past 10 days persuading congressional Democrats to go along, providing a possible blueprint for the next two years, when Republicans will control the House and hold more seats in the Senate.
"There probably is nobody on this floor who likes this bill," said House Majority Leader Steny Hoyer, D-Md. "The judgment is, is it better than doing nothing? Some of the business groups believe it will help. I hope they're right."
'Good for Growth'
Sweeping tax cuts enacted when George W. Bush was president are scheduled to expire Jan. 1 -- a little more than two weeks away. The bill extends them for two years, placing the issue squarely in the middle of the next presidential election, in 2012.
The extended tax cuts include lower rates for the rich, the middle class and the working poor, a $1,000-per-child tax credit, tax breaks for college students and lower taxes on capital gains and dividends. The bill also extends through 2011, a series of business tax breaks designed to encourage investment that expired at the end of 2009.
Workers' Social Security taxes would be cut by nearly a third, going from 6.2 percent to 4.2 percent, for 2011. A worker making $50,000 in wages would save $1,000; one making $100,000 would save $2,000.
"This legislation is good for growth, good for jobs, good for working and middle class families, and good for businesses looking to invest and expand their work force," said Treasury Secretary Timothy Geithner.
Some Democrats complained that the package is too generous to the wealthy; Republicans complained that it doesn't make all the tax cuts permanent.
Obama talks tax cuts, business investment
Rep. Ginny Brown-Waite, R-Fla., called it "a bipartisan moment of clarity."
The bill's cost, $858 billion, would be added to the deficit, a sore spot among budget hawks in both parties.
"I know that we are going to borrow every nickel in this bill," Hoyer lamented.
At the insistence of Republicans, the plan includes an estate tax that would allow the first $10 million of a couple's estate to pass to heirs without taxation. The balance would be subject to a 35 percent tax rate.
Many House Democrats wanted a higher estate tax, one that would allow couples to pass only $7 million tax-free, taxing anything above that amount at a 45 percent rate. They argued that the higher estate tax would affect only 6,600 of the wealthiest estates in 2011 and would save $23 billion over two years.
House Speaker Nancy Pelosi, D-Calif., called the estate tax the "most egregious provision" in the bill and held a vote that would have imposed the higher estate tax. It failed, 194 - 233.
No Pelosi vote
On the bill's final vote, House Speaker Nancy Pelosi, D-Calif., did not vote; House GOP leader John Boehner, R-Ohio, and Majority Leader Steny Hoyer, D-Md., voted for the bill, and Majority Whip James Clyburn, D-SC, voted against the bill, NBC News reported.
Boehner, after the vote, called the bill's passage "critically important."
"Stopping all the tax hikes is a good first step in our efforts to reduce the uncertainty family-owned small businesses are facing, but much more needs to be done, including cutting spending, permanently eliminating the threat of job-killing tax hikes, and repealing the job-killing health care law," Boehner, House speaker-designate, said in a prepared statement.
House Republicans who will move into powerful posts when the GOP takes control in January urged passage of the bill.
Rep. Eric Cantor of Virginia, in line to become majority leader, said the measure, while not perfect, marked a "first step" toward economic recovery.
Largely marginalized in the negotiations leading to the bill, Democrats emphasized their unhappiness with Obama.
"We stand today with only one choice: Pay the ransom now or pay more ransom later," said Rep. Brad Sherman of California. "This is not a place Democrats want to be. But, ultimately, it is better to pay the ransom today than to watch the president pay even more, and I think he'd be willing to pay a bit more next month."
Source: NBC News and The Associated Press contibuting to msnbc.com, 12/17/10.
Friday, November 12, 2010
Patient Protection & Affordable Care Act
We are committed to keeping you informed about health care reform and the Patient Protection and Affordable Care Act (PPACA). The PPACA has a 10-year implementaion period. Some PPACA reforms become effective as early as September 23, 2010. This newsletter is intended to provide a summary of some of the immediate implications of the reform act. Insurance companies have begun mailing notices to policyholders informing them of the companies' filings for proposed future rate adjustments.
Below is a list of benefit and eligibility enhancements that become effective on September 23rd. It is advised that these changes be communicated to employees. Note that "grandfathered plans" may not need to immediately comply with provisions affecting adult preventive care, discrimination, claims appeals and access to physicians. The September 23rd changes are:
1. Annual and lifetime dollar limits on network coverage are eliminated: Group health plans may no longer set lifetime limits on "essential health benefits."
2. Pre-existing condition limitations are waived for enrollees under age 19.
3. Dependents may remain on their parents' health plan until age 26 (some New York plans extend to age 29). If you have children in their 20's, or your employees do, you may want to consider adding such dependents to your plan.
4. There is no in-network cost-sharing for preventive care services. Plans will provide first dollar coverage for in-network preventive care.
5. Emergency Services must be covered without prior authorization and treated as in-network.
6. Plan members must be allowed to designate a child's pediatrician as the primary care provider. Plans may not require authorization or referrals for a participating OB-GYN.
The PPACA contains information defining discrimination in health plans. Under these new non-discrimination rules, group plans may not discriminate in favor of highly compensated employees (under IRC Section 105h). The term "highly compensated" is defined as one of the five highest paid officers, a shareholder owning 10% of the value of the stock, and/or an employee among the highest paid 25% of the employees. This may mean the end of certain plan designs where executives have a benefit separate from other employees (executive carve-out). Groups with low participation may also be affected.
The PPACA provides a tax credit for employer paid premiums for qualified firms. From 2010 to 2013, small businesses with 25 or fewer employees and an average wage of $50,000 or less are eligible for premium tax credits (for two years) of up to 35% of their contribution. To qualify, the business must contribute at least 50% of premium based on the rate of a single employee. Employers with 10 or fewer employees and average wages of $25,000 or less will be eligible for the 35% credit. In 2014, the credit will increase to 50% of eligible employer contributions. Groups with 11 - 25 employees with average earnings of $25,001 to $50,000 will be subject to a phase-out of the credit.
The PPACA will affect a business's reporting requirements. Companies will be required to report the cost of the employee sponsored health coverage to their employees on IRS Form W2.
On a state level, the New York State Legislature passed S58099 on June 7, 2010. This notice provides group policyholders information, or "Advance Notice," about the insurers filing for changes in premium rates for 2011. These filings are subject to review and approval by the New York State Insurance Department. The actual size of the increase will be released in a renewal letter approximately 60 days before renewal date. The total estimated percent increase includes multiple components: a basic increase or trend increase, an additional increase resulting from the cost of benefit enhancements required by the new PPACA, and the elimination of the New York State subsidy for small group mental health benefits (Timothy's Law).
Below is a list of benefit and eligibility enhancements that become effective on September 23rd. It is advised that these changes be communicated to employees. Note that "grandfathered plans" may not need to immediately comply with provisions affecting adult preventive care, discrimination, claims appeals and access to physicians. The September 23rd changes are:
1. Annual and lifetime dollar limits on network coverage are eliminated: Group health plans may no longer set lifetime limits on "essential health benefits."
2. Pre-existing condition limitations are waived for enrollees under age 19.
3. Dependents may remain on their parents' health plan until age 26 (some New York plans extend to age 29). If you have children in their 20's, or your employees do, you may want to consider adding such dependents to your plan.
4. There is no in-network cost-sharing for preventive care services. Plans will provide first dollar coverage for in-network preventive care.
5. Emergency Services must be covered without prior authorization and treated as in-network.
6. Plan members must be allowed to designate a child's pediatrician as the primary care provider. Plans may not require authorization or referrals for a participating OB-GYN.
The PPACA contains information defining discrimination in health plans. Under these new non-discrimination rules, group plans may not discriminate in favor of highly compensated employees (under IRC Section 105h). The term "highly compensated" is defined as one of the five highest paid officers, a shareholder owning 10% of the value of the stock, and/or an employee among the highest paid 25% of the employees. This may mean the end of certain plan designs where executives have a benefit separate from other employees (executive carve-out). Groups with low participation may also be affected.
The PPACA provides a tax credit for employer paid premiums for qualified firms. From 2010 to 2013, small businesses with 25 or fewer employees and an average wage of $50,000 or less are eligible for premium tax credits (for two years) of up to 35% of their contribution. To qualify, the business must contribute at least 50% of premium based on the rate of a single employee. Employers with 10 or fewer employees and average wages of $25,000 or less will be eligible for the 35% credit. In 2014, the credit will increase to 50% of eligible employer contributions. Groups with 11 - 25 employees with average earnings of $25,001 to $50,000 will be subject to a phase-out of the credit.
The PPACA will affect a business's reporting requirements. Companies will be required to report the cost of the employee sponsored health coverage to their employees on IRS Form W2.
On a state level, the New York State Legislature passed S58099 on June 7, 2010. This notice provides group policyholders information, or "Advance Notice," about the insurers filing for changes in premium rates for 2011. These filings are subject to review and approval by the New York State Insurance Department. The actual size of the increase will be released in a renewal letter approximately 60 days before renewal date. The total estimated percent increase includes multiple components: a basic increase or trend increase, an additional increase resulting from the cost of benefit enhancements required by the new PPACA, and the elimination of the New York State subsidy for small group mental health benefits (Timothy's Law).
Friday, October 29, 2010
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
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
Wednesday, October 13, 2010
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.
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.
Wednesday, September 15, 2010
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
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
Thursday, August 26, 2010
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
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
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