Retiring Business Owners, What’s Going to Happen to Your Business?

When the business owner retires, what happens to employees, clients and family members all depends on what the business owner has planned, asks an article from Florida Today titled “Estate planning for business owners: What happens to your business when you leave?” One task that no business owner should neglect, is planning for what will happen when they are no longer able to run their business, for a variety of reasons.

The challenge is, with no succession plan, the laws of the state will determine what happens next. If you started your own business to have more control over your destiny, then you don’t want to let the laws of your state determine what happens, once you are incapacitated, retired or dead.

Think of your business succession plan as an estate plan for your business. It will determine what happens to your property, who will be in charge of the transition and who will make decisions about whether to keep the business going or to sell it.

Your estate planning attorney will need to review these issues with you:

Control and decision-making. If you are the sole owner, who will make critical decisions in your absence? If there are multiple owners, how will decisions be made? Discuss in advance your vision for the company’s future, and make sure that it’s in writing, executed properly with an attorney’s help.

What about your family and employees? If members of your family are involved in the business, work out who you want to take the leadership reins. Be as objective as possible about your family members. If the business is to be sold, will key employees be given an option of buying out the family interest? You’ll also need a plan to ensure that the business continues in the period between your ownership and the new owner, in order to retain its value.

Plan for changing dynamics. Maybe family members and employees tolerated each other while you are in charge, but if that relationship is not great, make sure plans are enacted so the business will continue to operate, even if years of resentment come spilling out after you die. Your employees may be counting on you to protect them from family members, or your family may be depending upon you to protect them from disgruntled employees or managers. Either way, do what you can in advance to keep everyone moving forward. If the business falls apart the minute you are gone, there won’t be anything to sell or for the next generation to carry on.

How your business is structured, will have an impact on your succession plan. If there are significant liability elements to your business, risk management should also be built into your future plans.

To make your succession plan work, you will need to integrate it with your personal estate plan. If you have a Last Will and Testament in a Florida-based business, the probate judge will appoint someone to run the business, and then the probate court will have administrative control over the business, until it’s sold. That probably isn’t what you had in mind, after your years of working to build a business. Speak with an estate planning attorney to find out what structures will work best, so your business succession plan and your estate plan will work seamlessly without you.

Reference: Florida Today (Feb. 12, 2019) “Estate planning for business owners: What happens to your business when you leave?”

Suggested Key Terms: Business Owner, Succession Plan, Estate Planning Attorney, Key Employees

A Love Letter to Your Family

Now, to the 70% of Americans who do not have an estate plan, the article “Senior Spotlight: Composing the ‘family love letter’” from the Lockport Journal should help you understand why this is so important. One reason why people don’t take care of this simple task, is because they don’t fully understand why estate planning is needed. They think it’s only for the wealthy, or that it’s only for old people, or even that it’s only about death and taxes.

Consider this idea: an estate plan is about protecting yourself while you are alive, protecting your family when you have passed and leaving a legacy for the living.

Some of the main elements of an estate plan are to create and execute documents that provide for incapacity and death, as well as provide information about your assets, liabilities and wishes.

You’ve spent a lifetime accumulating assets. It is now time to sit down with family members and have a heart-to-heart talk about the details of the estate and what your intentions are with respect to its distribution. The subject of death can be challenging for all. However, discussing your estate plan is vital, if you want to protect your family from what might come after you are gone. Each family has its own goals, so it’s a good idea to talk about it frankly, while you still can.

Without discussions and an estate, the chances of a family split, assets not going where you had intended and unnecessarily higher costs in taxes and legal fees, are a very real possibility.

If speaking about these topics is too hard, you may want to write your family a love letter. It would contain all the information that your family would need at the time of your death or if you become incapacitated because of illness or injury.

Your estate plan should also include the documents needed, so your family can make decisions on your behalf, if you are incapacitated. That includes a power of attorney, a health care directive and may include others specific to your situation.

Ideally, all this information will be located in one convenient place. Don’t put it on a computer where you use a password. If the family cannot access your computer, all your hard work will be useless to them. Put it in a folder or a notebook, that is clearly labeled and tell family members where it is.

They’ll need this information:

  • A list of your important contacts — your estate planning attorney, financial advisor, CPA, insurance broker and medical professionals.
  • Credit card information, frequent flier miles.
  • Insurance and benefits including all health, life, disability, long-term care, Medicare, property deeds, employment and any military benefits.
  • Documents including your will, power of attorney, birth certificates, military papers, divorce decrees and citizenship papers.

Think of these materials and discussions as your opportunity to make a statement for the future generation. If you don’t have an estate plan in place already or if you have not reviewed your estate plan in more than a few years, it’s time to make an appointment for a review. Your life may have not changed, but tax laws have, and you’ll want to be sure your estate is not entangled in old strategies that no longer benefit your family.

Reference: Lockport Journal (Feb. 16, 2019) “Senior Spotlight: Composing the ‘family love letter’”

When Was the Last Time You Talked with Your Estate Planning Attorney?

If you haven’t had a talk with your estate planning attorney since before the TCJA act went into effect, now would be a good time to do so, says The Kansas City Star in the article “Talk to estate attorney about impacts of Tax Cuts and Jobs Act.” While most of the news about the act centered on the increased exemptions for estate taxes, there are a number of other changes that may have a direct impact on your taxes.

Start by looking at any wills or trusts that were created before the tax act went into effect. If any of the trusts use formulas that are tied to the federal estate tax exemption, there could be unintended consequences because of the higher exemption amounts.

The federal estate tax exemption doubled from $5.49 million per person in 2017 to $11.18 million per person in 2018 (or $22.36 million per couple). It is now $11.2 million per person in 2019 (or $22.4 million per couple).

Let’s say that your trust was created in 2001, when the estate tax exemption was a mere $675,000. Your trust may have stipulated that your children receive the amount of assets that could be passed free from federal estate tax, and the remainder, which exceeded the federal estate tax exemption, goes to your spouse. At the time, this was a perfectly good strategy. However, if it hasn’t been updated since then, your children will receive $11.4 million and your spouse could be disinherited.

Trusts drafted prior to 2011, when portability was introduced, require particular attention.

Two other important factors to consider are portability and step-up of cost basis. In the past, many couples relied on the use of bypass or credit shelter trusts that pay income to the surviving spouse and then eventually pass trust assets on to the children, upon the death of the surviving spouse. This scenario made sure to use the first deceased spouse’s estate exemption.

However, new legislation passed in 2011 allowed for portability of the deceased spouse’s unused estate exemption. The surviving spouse’s estate can now use any exemption that wasn’t used by the first spouse to die.

A step-up in basis was not changed by the TCJA law, but this has more significance now. When a person dies, their heir’s cost basis of many assets becomes the value of the asset on the date that the person died. Highly appreciated assets that avoided income taxes to the decedent, could avoid or minimize income taxes to the heirs. Maintaining the ability for assets to receive a step-up in basis is more important now, because of the size of the federal estate tax exemption.

Beneficiaries who inherit assets from a bypass or credit shelter trust upon the surviving spouse’s death, no longer benefit from a “second” step-up in basis. The basis of the inheritance is the original basis from the first spouse’s death. Therefore, bypass trusts are less useful than in the past, and could actually have negative income tax consequences for heirs.

If your current estate plan has not been amended for these or other changes, make an appointment soon to speak with a qualified estate planning attorney. It may not take a huge overhaul of the entire estate plan, but these changes could have a negative impact on your family and their future.

Reference: The Kansas City Star (Feb. 7, 2019) “Talk to estate attorney about impacts of Tax Cuts and Jobs Act”

The Dark Side of Reverse Mortgages for Seniors
reverse mortgage

The Dark Side of Reverse Mortgages for Seniors

It sounds great, even if you know that the reverse mortgages are known to be a little on the pricey side. However, unexpected circumstances can make this last-chance-to-save-your-retirement strategy backfire in a big way. Just ask Evelyn Boice, who is still wearing the same clothing that she brought to babysit her grandchildren last February. The Union Leader shares her story in the article “Silver Linings: Reverse mortgages for seniors–Lifestyle Maintenance or money pit?”

It seems that a flood at Evelyn’s retirement home caused by burst pipes led to a financial disaster. She’s 83 and didn’t expect to spend her last years living in an apartment attached to her daughter’s home. She’s got a chair, a TV, a bed and a kitchen stool. Everything she owned was destroyed in the flood.

She does have a lot of notebooks—stacks of confusing and incomplete financial statements loaded with indecipherable charges, including a $35 charge every time she calls the reverse mortgage company for help. She’s got threatening letters about being in default, while she waits for the mortgage lender to release an insurance check for $48,651 that she would use to salvage what’s left of her home.

When she called the insurance company, she heard an awful comment from someone at the office: “Why doesn’t she just hurry up and die?”

Boice took out a reverse mortgage in 2007 and used $50,000 of a $200,000 loan to make emergency repairs after Hurricane Wilma struck her home, blowing out windows and doors. However, the danger comes, when homeowners don’t have enough money to live on and maintain their homes, make essential repairs or pay for insurance and property taxes. That’s non-negotiable with a reverse mortgage. Any kind of default can lead to a cascade of new expenses for appraisals, property inspections and legal work to protect the lender. The lender has all the power and all the fine print.

Her case is an extreme example of what can go wrong. In 12 years, an unbelievable amount of paperwork has accumulated. One document shows that she owes $265,000, a number that keeps increasing. The monthly interest charges range from $100 to more than $1,000, and lump sums of more than $2,500, reflecting property taxes.

Boice is getting some help from the Claremont office of New Hampshire Legal Assistance. They are helping her work through the issue, but it may only come in the form of tax deferment or reductions.

Before taking out a reverse mortgage, seniors should look at all available options. They should also have an attorney review the contract from the reverse mortgage company. One small mistake can end up costing hundreds of thousands of dollars.

Reference: Union Leader (Feb. 2, 2019) “Silver Linings: Reverse mortgages for seniors–Lifestyle Maintenance or money pit?”

Suggested Key Terms: Reverse Mortgages, Seniors, Interest Rates, Fine Print, Home Equity Conversion Mortgages, HECMs

Moving to a Care Community? Check the Fine Print
Group Of Senior Couples Enjoying Meal Together In an Assisted Living Facility

Moving to a Care Community? Check the Fine Print

Reading the fine print when purchasing a home in a retirement community or a care community is intimidating. The typeface is tiny, you’ve got boxes to pack and movers to schedule and, well, you know the rest. What most people do, is hope for the best and sign. However, that can lead to trouble, advises Delco Times in the article “Planning Ahead: Moving to a care community? Read the agreement.”

If you don’t want to read the fine print or can’t make head or tails of what you are reading, one option is to ask your estate planning attorney to do so. Without someone reading through and understanding the contract, you and your family may be in for some unpleasant surprises. Here are some things to consider.

What kind of a community are you moving into? If you are moving to a Continuing Care or Assisted Living Community, your documents will probably have provisions regarding health insurance, entry fees, deposits, a schedule of costs, if you need additional services, fees for moving to a higher level of care and provisions for refunds and estate planning.

When you enter an long-term care facility, nursing home, or Assisted Living facility, you may find yourself signing documents regarding everything from laundry policies, pharmacy choices, financial disclosures and statements of your rights as a resident. Not every document you sign will be critical, but you should understand everything you sign.

If moving into a nursing home that accepts Medicaid, you and your family need to know that nursing homes that accept Medicaid are not permitted to demand payment on admission from either an adult child or a power of attorney from their own funds. However, Pennsylvania does have support provisions regarding children, that are called “filial responsibility.” This should not be a problem, as long as you speak with an elder law attorney who can make sure you have completed the Medicaid application correctly and are in full compliance with all of the requirements.

If your adult children ask you to sign documents and “don’t worry” about what documents are, you may want to sit down with an experienced elder law attorney to review the documents. When someone is not trained to review these documents, they won’t know what red flags to look for.

If someone signs the document who is not the applicant/future resident, that person may become responsible for the costs, depending upon what role you have when you sign: are you a guarantor or indemnitor? That person typically agrees to pay after the applicant/resident’s funds are exhausted. The payments may have to come from their own funds. Sometimes the “responsible party” is simply the person who handles business matters on the applicant’s behalf. You’ll want to be sure that the person signing the papers understands what they are agreeing to.

Almost all agreements will say that the applicant, or the person receiving services, is responsible for payment from their own assets. However, if someone signing the documents is power of attorney, they need to be mindful of what they are signing up for.

If possible, the person who will receive services should be the one who signs any paperwork, but only after a thorough review from an experienced attorney.

Reference: Delco Times (Feb. 5, 20-19) “Planning Ahead: Moving to a care community? Read the agreement”

Timing Is Everything Where Medicare’s Concerned
Timing is Everything

Timing Is Everything Where Medicare’s Concerned

There are many complex rules about transitioning from employment-based health care coverage to Medicare, and mistakes are expensive and often, permanent. That’s the message from a recent article in The New York Times titled “If You Do Medicare Sign-Up Wrong, It Will Cost You.”

Tony Farrell did all the right things — he did the research and made what seemed like good decisions. However, he still got tripped up, and now pays a penalty in higher costs that cannot be undone. When he turned 65 four years ago, he was still working and covered by his employer’s group insurance plan. He decided to stay with his employer’s plan and did not enroll in Medicare. Four months later, he was laid off and switched his health insurance to Cobra. That’s the “Consolidated Omnibus Budget Reconciliation Act” that allows employees to pay for their own coverage up to 36 months after leaving a job.

Medicare requires you to sign up during a limited window before and after your 65th birthday. If you don’t, there are stiff late-enrollment penalties that continue for as long as you live and potentially long waits for coverage to start. There’s one exception. If you are still employed at age 65, you may remain under your employer’s insurance coverage.

What Mr. Farrell didn’t know, and most people don’t, is that Cobra coverage does not qualify you for that exemption. He didn’t realize this mistake for over a year, when his Cobra coverage ended, and he started doing his homework about Medicare. He will have to pay a late-enrollment penalty equal to 20% of the Part B base premium for the rest of his life. His monthly standard premium increases for Mr. Farrell from $135.50 to $162.60.

There are several pitfalls like this and very few early warnings. Moving from Affordable Care Act coverage to Medicare is also complex. There are also issues if you have a Health Savings Account, in conjunction with high-deductible employer insurance.

Here are some of the most common situations:

Still employed at 65? You and your spouse may delay enrollment in Medicare. However, remember, Cobra does not count. You still need to sign up for Medicare.

If you have a Health Savings Account (HSA), note that HSAs can accept contributions only from people enrolled in high deductible plans, and Medicare does not meet that definition. You have to stop making any contributions to the HSA, although you can continue to make withdrawals. Watch the timing here: Medicare Part A coverage is retroactive for six months for enrollees, who qualify during those months. For them, HSA contributions must stop six months before their Medicare effective date, in order to avoid tax penalties.

There are many other nuances that become problematic in switching from employer insurance to Medicare. If this sounds complicated, at least you are not alone. Moving to Medicare from other types of insurance is seen as complicated, even by the experts. The only government warning about any of this comes in the form of a very brief notice at the very end of the annual Social Security Administration statement of benefits.

There are advocacy groups working on legislation that would require the federal government to notify people approaching eligibility about enrollment rules and how Medicare works with other types of insurance. The legislation was introduced in Congress last year – the Beneficiary Enrollment Notification and Eligibility Simplification Act — and will be reintroduced this year.

Reference: The New York Times (Feb. 3, 2019) “If You Do Medicare Sign-Up Wrong, It Will Cost You”

How Do I Prepare my Parents for Alzheimer’s?
Concerned aged mother and adult daughter discuss updating their estate planning documents and explore their options with regards to Alzheimer's

How Do I Prepare my Parents for Alzheimer’s?

Can your mom just sell her house, despite her diagnosis of Alzheimer’s?

The (Bryan TX) Eagle reports in the recent article “MENTAL CLARITY: Shining a light on the capacity to sign Texas documents” that the concept of “mental capacity” is complicated. There’s considerable confusion about incapacity. The article explains that different legal documents have a different degree of required capacity. The bar for signing a Power of Attorney, a Warranty Deed, a Contract, a Divorce Decree, or a Settlement Agreement is a little lower than for signing a Will. The individual signing legal documents must be capable of understanding and appreciating what he or she is signing, as well as the effect of the document.

The answer the question of whether the mom can sign the deed to her house over to the buyer.  is likely “yes.” She must understand that she’s selling her house, and that, once the document is signed, the house will belong to someone else. A terminal diagnosis or a neurodegenerative disease doesn’t automatically mean that an individual can’t sign legal documents. A case-by-case assessment is required to see if the document will be valid.

The fact that a person is unable to write his or her name doesn’t mean they lack capacity. If a senior can’t sign her name (possibly due to tremors or neurodegeneration), she can sign with an “X”. She could place her hand on top of someone else’s and allow the other person to sign her name. If this is completed before witnesses and the notary, that would be legal.

A hard part of Alzheimer’s is that a person’s mental clarity can come and go. Capacity can be fluid in the progress of a neurodegenerative or other terminal disease. Because of this, the best time to sign critical documents is sooner rather than later. No one can say the “window of capacity” will remain open for a certain amount of time.

Some signs should prompt you to move more quickly. These include things like the following:

  • Short-term memory loss;
  • Personality changes (e.g., unusual anger);
  • Confusing up or forgetting common-usage words and names; and
  • Disorientation and changes in depth perception.

Any of the signs above could be caused by Alzheimer’s, dementia, or many other problems. Talk to your, or your parent’s, physician and an elder law attorney. He or she can discuss the options, document your parent’s legal capacity, and get the right documents drafted quickly. Your elder law attorney can also give you information about planning for long term care options to consider and can help you understand the costs associated with long term care. 

Using a Health Savings Account for Retirement Health Care Costs

If it’s done right, the older American worker has an opportunity to save additional money for health costs during retirement. That’s if they do it right, according to CNBC’s article Over 55? Maximize your savings in this tax-advantaged account.” Over 55? You can put away an additional $1,000.

Starting in 2019, people with self-only coverage in a high-deductible health insurance plan will be allowed to save up to $2,500 in a Health Savings Account (HSA). If you’ve got family coverage, you can save $7,000.

HSAs permit users to put away money that is pre-tax or tax deductible. The funds accumulate interest on a tax-free basis, and then the account owner can withdraw the money tax-free for qualified medical expenses. Catch-up contributions for those 55 and older of $1,000, make this an even more attractive way to save for health care costs.

However, there are a few complications you’ll need to know about, if you are married and if you are getting close to being eligible for Medicare.

Keeping one HSA, if you’re married and in a high-deductible health plan works, until one of the spouses celebrates a 55th birthday. If the spouse under 55 years has the HSA account, but the older spouse is eligible for the catch-up contribution, the spouse who is over 55 should open their HSA and put away the additional $1,000. There are no joint HSAs, so only the older spouse can make that contribution.

If both spouses are 55, the only way each can make a $1,000 contribution, is if they have separate HSAs. If both spouses have family coverage, they can split the total plan contribution of $7,000 between the two accounts. However, those $1,000 catch up contributions still have to go into the account of the spouse permitted to make that contribution.

Once you or your spouse turns 65 and you enroll in Medicare, you are no longer permitted to make contributions. You can use the funds for qualified medical expenses, but no more contributions.

Let’s say you celebrated your 65th birthday in July and enrolled in Medicare. You were in a plan with self-only coverage. In that case, you are only permitted to make contributions until June—one month before you enrolled in Medicare. The most you are permitted to contribute to your HSA account for that year would be $2,250.

Contribute too much, and you’ll need to get the money out of there. Your deadline to do so is April 15.

One last detail: you are permitted a one-time-only rollover from your IRA to your HSA. There’s a limit, of course: $3,500 if you have self-only coverage or $7,000 if you have a family plan—and the $1,000 catch-up contribution if you’re over 55. It’s a smart move, taking taxable money and making it nontaxable, as long as it’s used for qualified medical expenses.

ReferenceCNBC (Dec. 24, 2018) Over 55? Maximize your savings in this tax-advantaged account”

Are Your Powers of Attorney ‘Hot’ Enough?

Many states, including Texas, allow people to give the agent named in their financial power of attorney what are referred to as “hot” powers, if they wish. This requires careful decision making, says the Glen Rose Reporter in an article that poses a question: “Should you add hot powers to your power of attorney?”

The “hot” powers are well-named, since they give a financial power of attorney considerable power. They allow the agent to create, amend, revoke or terminate a trust during the principal’s lifetime. The agent may also make a gift. In Texas, this is subject to the limitations under Texas Estates Code §751.032 and any special instructions, to create or change rights of survivorship, create or change a beneficiary designation and to authorize another person to exercise the authority granted under the power of attorney.

That is considerable leeway for an agent to be given during one’s lifetime.

In one case, a man decided that he wanted to give some of these “hot” powers to a power of attorney, but not all of them. Unless he made specific directions, he would be giving someone the ability to make gifts outright to individuals, to a trust, an UGMA (Uniform Gift to Minors Act) account or a qualified tuition program that meets the requirements of §529.

The attorney in this case advised the client that the gifts an agent can make, are limited to the dollar limits of the federal gift tax exclusion, or twice that, if the spouse agrees to a gift split as allowed under the Internal Revenue Code.

The gifts the agent can make are further limited to being consistent with the principal’s objectives, if the agent knows what those objectives are. However, if the agent does not know what those objectives are, he or she must still make sure the gift is aligned with the principal’s best interest, based on the value and nature of the principal’s property, foreseeable obligation and the need for maintenance.

The power of attorney in all cases needs to know what their responsibilities are, and if they are given “hot” powers, they need to be informed what those specific powers are. If the agent is someone other than a spouse or descendant, that agent may not make gifts to themselves. A spouse or descendant, however, could make gifts to themselves.

The man in this example wisely decided that while his son was very trustworthy and was going to be named his financial power of attorney, it would not be a good idea to place so much temptation in the young man’s path. Therefore, he instructed his attorney to modify the statutory form of the power of attorney, so his son is not permitted to make any gifts to himself.

Reference: Glen Rose Reporter (Jan. 3, 2019) “Should you add hot powers to your power of attorney?”

Is There an ADU in Your Future?

The idea of aging in place is something we’d all like to do. However, homes with many stairs or that are located in cold climates don’t always make this possible. One way that some families are addressing this wish to age in place: the Accessory Dwelling Unit, or ADU, according to Next Avenue in the article“Could an Accessory Dwelling Unit Help Your Aging Parent?” The flexibility—a home for mom for a few years, then used as an income-producing apartment—makes this an attractive option.

Sometimes referred to as a “granny pod,” the ADU is usually a small structure in a backyard, with little more than a bathroom, sleeping quarters and a kitchen. They are basically “tiny homes,” the very small living quarters that some people are opting for, in place of sprawling homes.

A survey by AARP found a third of adults 50 and older would be open to living in an ADU. Why not? It’s a great way to have some degree of privacy, while living near, but not with, children and grandchildren.

Communities are starting to update their zoning laws to permit the construction of ADUs, especially where housing costs are high. In Los Angeles, ADUs have been legal since 2017, when new laws about their use went into effect and the increase of ADU construction permits increased by 1,000%. Housing codes changes are being examined in many other cities, including Boston, Denver, Chicago, Denver, Seattle and Washington DC, say industry experts.

Some barriers still exist, and they may not go away quickly. One is that ADUs are not cheap, even thought they are small. Many cost $150,000 or more. Much of the cost is to hook the little house up to local utilities, as well as the cost of construction. Most lenders don’t offer ADU mortgages, so payment tends to be with cash or with a home equity line of credit. This restricts the number of people who can afford an ADU.

Local communities not behind the concept of an ADU, may be concerned about the little houses being less like a tiny home and more like a shack, having a negative impact on neighborhood looks and values. Zoning codes, even those that are changing, are strict about maintaining the structures.

If your family would benefit from an ADU, start by checking with your town’s planning or building department. If the community permits the use of ADUs, you’ll want to find local builders who have constructed ADUs before. Some builders may not be interested in what they perceive as a very small project.

As boomers grow and strive to maintain their independence, expect to see more communities embrace the use of ADUs.

Reference: Next Avenue (Jan. 2, 2019) “Could an Accessory Dwelling Unit Help Your Aging Parent?”