Posted on

Why a Living Will is Important

Why a Living Will is Important

A living will lays out your preferences for life-sustaining medical treatment.  It is often accompanied by a health-care proxy or power of attorney, which allows someone to make treatment decisions for you if you are incapacitated and the living will does not have specific instructions for the situation at hand.  “Living will” and “advance directive” are often used synonymously, but a living will legally only applies after a terminal diagnosis, whereas an advance directive is much more comprehensive and includes the health care proxy.

As of 2017, only around one in three American adults had an advance directive for end-of-life care prepared. Those who are older than 65 are more likely to have an advance directive prepared than those who are younger, as are those have chronic illness more likely than those who are not. People may be unwilling to prepare these documents because they fear that they won’t necessarily reflect their wishes at the time they become relevant; sometimes patients become more willing to undergo treatments they rejected when they were younger as they age and develop medical problems. However, the documents can be changed as long as they are witnessed and potentially notarized (depending on current law). And if you continue to communicate your values with your proxy, they can make decisions based on your most recent preferences. 

So why is a living will important? It reduces ambiguity which can prevent family disputes during what is already a difficult time. It may seem like something that can be put off, but life is unpredictable; one never knows when these documents could become relevant. Furthermore, it needn’t be a hassle. A living will is a straightforward document, however it’s important to work with legal counsel to make sure your beliefs are properly stated. Other health care documents should also be prepared at that time, like a health care power of attorney that designates a person to make health care decisions for you if you are unable. Once you have signed any documents make sure you keep them updated, especially if you change states, and be diligent in communicating with whomever you named to act on your behalf.

If you need a living will or health care power of attorney or already have one that you would like reviewed, give us a call at 1.800.660.7564 or email us at info@covertlaw.com. 

 

Read more at:

Posted on

Understanding Gift Taxes

Understanding Gift Taxes

Now that we have passed into a new year, many people will begin to think about making gifts to children and grandchildren in addition to holiday gifts just given.  These are typically larger gifts of cash or marketable securities.  When we make a gift of something to someone else, that is what is called a “gift taxable transaction” – meaning someone has to pay a tax on the making of that gift.  So who pays the tax, and how much is the tax is the subject of this blog post.

The one who is making the gift is often referred to as the “donor.”  The “donee” is the person receiving the gift.  Any gift taxes that may have to be paid upon making the gift are always paid by the donor, not the donee.

The gift tax is simply a tax on the transfer of assets, cash or property, to another without receiving something of equal value. The asset has to be of a certain value for the tax to apply; otherwise, it falls under the gift tax exclusion, either annual or lifetime. If the gift is above a certain value, you will have to fix out a tax form, but you may still be able to avoid the tax.

The value is based on the IRS definition of “fair market value.” If the asset is cash, then the calculation is straightforward: it is what it is. If the asset is a house, then its value is what someone would pay for it if neither buyer nor seller was under duress to commit. And some things which seem not to be gifts on their face may nonetheless be considered such by the IRS, for example, casual loans to friends and families, or naming someone other than a spouse on a bank account. 

The annual gift tax exclusion in 2019 and 2020 applies to assets up to $15,000 in value. It is counted per recipient, meaning you can give up to $15,000 to however many people you like without having to file a gift tax return. It is also per person, so you and your spouse could give up to $30,000 per year without having to file a gift tax return. Note that gifts between spouses are unlimited and don’t generally trigger a gift tax return and that giving money to a nonprofit is a charitable donation and not a gift. Finally, the person receiving the gift usually doesn’t have to report it. 

The lifetime gift tax exclusion is how you avoid the tax, even if you give more than $15,000 per year and have to fill out the form. The gift tax return keeps track of the amount you have given.  In 2019, the lifetime exclusion was $11.4 million; in 2020, it rises to $11.58 million. As with the annual gift tax exclusion, the lifetime exclusion is per person, so married couples can exclude twice the gifted amount. 

The tax only applies once you use up not only the $15,000 exclusion but also the $11 million-plus exclusion. So if you gift someone $50,000 one year, that counts as $35,000 against the lifetime exclusion. If you do manage to use up your exclusions, the rates range from 18% to 40%, paid by the donor. 

However, there are exceptions and special rules for how to calculate the tax, which can be found on IRS Form 709. These apply to things like college tuition and medical bills by allowing you to spread one-time gifts across multiple years’ worth of gift tax returns, or to pay the institution directly to avoid the gift tax return requirement.

If you have questions or would like to discuss your personal estate plan, please don’t hesitate to reach out by calling us as 1.800.660.7564 or by emailing us at info@covertlaw.com.

 

Read more at:

Posted on

The SECURE Act of 2020

The SECURE ACT of 2020

Congress has passed a bipartisan appropriations bill. In the contents of this spending bill is a piece of legislation known as the Setting Every Community Up for Retirement Enhancement Act (SECURE), the first significant change in retirement legislation since the Pension Protection Act in 2006. The President signed the Act into law on December 20, and its effective date is January 1, 2020.

The impact of the SECURE Act to some retirees, near-retirees, and their future beneficiaries is profound, and it is imperative to schedule a review of your retirement, estate, and trust plans. Failure to act on the changes brought forward by the SECURE Act can create substantial tax burdens for some beneficiaries and even the possibility that they become locked out of their inheritance for a decade. 

One of the most important provisions of the SECURE Act to understand is the removal of the stretch IRA required minimum distribution (stretch RMD). In essence, the removal will act as a tax revenue generator. This change means many Americans will face a tax increase as non-spouse beneficiaries must spread withdrawals over a maximum of ten years and not the lifetime of the account holder. The removal of the RMD for stretch IRAs is going to create significant problems for certain types of trusts, like the “see-through trust,” that were written before the SECURE Act. Previously, a see-through trust allowed an individual, upon their death, to pass retirement assets of their IRAs via a trust to a chosen beneficiary. If the trust is not updated to match the current SECURE Act language, there could be restrictions in accessing funds to the heirs, which may cause massive tax liabilities down the line.  

Annuities are also affected by the SECURE Act as the legislation will ease restrictions to include them in consumers’ 401(k)s. While this is a positive for lifetime income, the bill also lessens and even removes some of the fiduciary requirements to vet insurance companies and their financial products before allowing them into your 401(k) plan. This change, coupled with a reduction in overall standards the SEC imposed earlier this year, creates an increased likelihood that consumers could experience negative consequences from poorly designed financial products and the possibility of insurance company failure.

According to Forbes, there are eight significant ways the SECURE Act will impact your retirement plans. They include an increase in ability for small employer access to retirement plans, an increase in annuity options inside of retirement plans, an increase in required minimum distribution (RMD) ages, and the removal of age limits on IRA contributions. There is also a tax credit to encourage automatic enrollment into retirement plans through small employers, penalty-free distributions for childbirth or adoption, lifetime income disclosure for defined contribution plans for transparency, and the removal of stretch inherited IRA provisions.

It is imperative as an individual to be responsive to the changes this proposed new law will enact. Currently, estate attorneys, CPAs, and financial advisors are receiving additional training to understand the long-term tax implications of SECURE Act provisions. For those affluent retirees, Kiplinger advises there are five things you can do immediately to respond to the SECURE Act. The first is to delay your IRA distributions if possible, and continue to save but perhaps not in an IRA. Also, consider paying taxes BEFORE your children inherit your IRA. Talk to your financial planner, tax advisor, and revisit your existing estate planning documents to make sure the plans don’t compromise any existing IRAs that will be passed on to your beneficiaries. 

The overall implications of the SECURE Act to your retirement and your estate plan are numerous. Give us a call at 1.800.660.7564 to discuss how we can help make sure your retirement assets pass with as few tax consequences as possible – or email us at info@covertlaw.com.