In-Law Protection

Dear Garden State Trust:

I have two grown children, both married.  One couple is financially secure; the other is less so.  Candidly, I don’t trust the spouse of my child who is struggling.  Is there something I can do to keep that child’s inheritance from the spouse’s hands?  How do I treat the children differently without provoking a family feud?  

— Discriminating Parent

Dear Discriminating:

The best way to protect an inheritance is by using a trust, giving the beneficiary a financial resource instead of financial assets.  The trust may distribute income to the beneficiary each year but include restrictions on principal distributions.  For example, the trust might be invaded for medical or education expenses, or to purchase a home, or upon reaching certain milestones.  The trust beneficiaries may be limited to your descendants, excluding sons-in-law and daughters-in-law.

The terms of a trust are not normally made public, but are known only to the creator of the trust, the trustee and the beneficiaries.  Accordingly, if you have two trusts for your two children, you may provide different restrictions for each.  They don’t have to be told about the differences.

Do you have a question concerning wealth management or trusts?  Send your inquiry to contact@gstrustco.com

© M.A. Co.  All rights reserved.

An Introduction to ABLE Accounts

On December 3, 2014, Congress passed the Achieving a Better Life Experience Act, or as it’s more commonly known as, the ABLE Act. The ABLE Act authorized a new type of tax-favored savings account for blind or disabled individuals with a qualifying disability incurred prior to age 26.  As of January 1, 2018, these individuals may receive up to $15,000 per calendar year in an ABLE account, without having the funds in the account counted against them for Medicaid or SSI eligibility purposes.  The ABLE account beneficiary is able to manage the funds on deposit in the account and may use the account proceeds to pay for “qualified disability expenses (QDEs).” As long as the expenditures of funds from the ABLE account being attributed to the blind or disabled account beneficiary are used for QDEs, the dollars will not be subject to federal income tax, nor will they be deemed as countable resources in determining eligibility for most federal welfare benefit programs.

So why is the ABLE account such an important vehicle?  Simply put, many disabled individuals and their families can’t afford the rising costs of care related to their lives with disabilities. Medicaid and SSI only provide so much, and eligibility requirements force the beneficiary to have no more than $2,000 of countable assets at any time. ABLE accounts can protect additional resources for the disabled beneficiary, whose friends, family members, or the disabled individual himself, may transfer up to $15,000 per calendar year per disabled beneficiary into the ABLE account. Undistributed earnings will not be taxed, and no 10% penalty will apply on distributions.  The funds may accumulate in the account year after year, up to the applicable state 529 cap for Medicaid purposes. For SSI purposes, the limit is $100,000, after which eligibility for SSI is suspended until the account proceeds are spent down below the $100,000 SSI threshold. Therefore, assuming the account owner follows the rules of ABLE accounts (outlined below), he or she can not only receive Medicaid, SSI and/or SNAP (food stamps), but can also use the ABLE funds to supplement those benefits with tax-free dollars.

In order to be eligible to open an ABLE account, you must be deemed a disabled individual by the Social Security Administration, and need to have incurred such disability before turning age 26 (NOTE: This does not prohibit applicants aged 26 or older from applying, only those whose disability began after age 26). Should you meet the eligibility qualifications, the following financial regulations apply:

  • “Qualified disability expenses” or QDE’s are defined as “any expense related to the beneficiary as a result of living a life with disabilities1.” Examples of such expenses can include education, housing, assistive technology, transportation, health care expenses, and other expenses that help improve the individual’s quality of life1
  • As of January 1, 2018 until December 31, 2025, the funds on deposit in a 529 educational savings account may be rolled over into an ABLE account if the beneficiary of the 529 account, or a family member of that individual, is a qualified disabled beneficiary.

Similar to a First-Party Special Needs Trust (more information in future blog), there is a payback provision associated with ABLE accounts. This provision requires that upon the passing of the ABLE account owner, the state Medicaid agency that provided benefits to that individual is allowed to reclaim or recoup all or a portion of that individual’s ABLE account remaining after death, equal to the amount of dollars expended on behalf of the individual, beginning from the time their ABLE account was opened.

Ultimately, the supplemental financial support afforded to the beneficiary during lifetime almost always outweighs the downside of the Medicaid payback after death. Regardless, it’s imperative to speak with your tax, legal, and financial advisors before opening or contributing to an ABLE account

For more information on ABLE accounts and their potential utility for a loved one with disabilities, contact Sean Rice, CTFA, srice@gstrustco.com, (856)-281-1300.

1 http://ablenrc.org/

Elusive Treasures

St. Patrick’s day brings to mind the Irish legend of the pot of gold guarded by a leprechaun at the end of the rainbow. The pot of gold is simply unreachable because its location changes as soon as the treasure hunter’s location changes to investigate. The refracted light on water droplets that creates the rainbow effect is replaced with a different rainbow effect with even a single step towards it.

Perhaps there is some gold at the end of the proverbial rainbow, just waiting to be found. In the style of uncovering and cracking a code in Dan Brown’s novels, here are two interesting treasure hunts that Americans are undertaking to find gold:

  1. The Beale Cipher. There was a pamphlet sold in 1885 containing three ciphers, with one decoded that described the treasure, including gold coins buried in Virginia (estimated value of $43 million). The other two ciphers described the location and heirs for the treasure that was allegedly buried in 1820. Many attempts have been made to break the cipher, but none with recognized success to date. Several books and TV shows have mentioned the topic. Want to try to crack the code? It can be found on Wikipedia here.

Perhaps it’s real, or perhaps a ploy to sell pamphlets to eager treasure hunters.

  1. The Fenn Treasure. Noted millionaire author Forrest Fenn allegedly has hidden a treasure box of gold coins in the Rocky Mountains worth over $1 million, with the clues to find it buried in his book, The Thrill Of The Chase. The mountains can be dangerous, and Fenn has reportedly urged caution upon seekers. He suggested that the treasure is not hidden in a dangerous place, because it must be somewhere an 80-year-old man can access. Nevertheless, four hopefuls have lost their lives since the book was published, as they have been identified by authorities to be seekers of Fenn’s treasure.

Perhaps it’s real, or perhaps a ploy to sell books to eager treasure hunters.

At Garden State Trust Company, we’ll stick with focusing on a reasoned and conservative approach to building and preserving wealth for our clients rather than chasing rainbows or buried treasure.

Happy St. Patrick’s Day!

Roth Conversions

Dear Garden State Trust Company:

Last year I converted my traditional IRA to a Roth IRA. However, now that I see the income tax that will be due, I’m not so sure it was a great idea. Can I change my mind?

—Second Thoughts

Dear Second:

You have until October 15, 2018, to recharacterize your 2017 Roth IRA conversion, to turn it back into a traditional IRA.

But that option is not available for conversions for 2018 and later years.

The tax reform legislation enacted last December changed the rules for Roth conversions from traditional IRAs, SEPs and SIMPLE plans. After January 1, 2018, such conversions are irrevocable once made. The legislative language was ambiguous, and some exeprts were concerned that it might retroactively affect 2017 conversions as well.

In January the IRS issued a clarifying Q&A on the subject. The new law does not apply to 2017 conversions, so you are free to reverse course.

Do you have a question concerning wealth management or trusts? Send your inquiry to contact@gstrustco.com.

© 2018 M.A. Co. All rights reserved.

Think Hard Before Tapping Your 401(k) Balance

One of the features that make 401(k) plans so attractive is that your money is not completely out of reach should an emergency need arise. Most plans allow for loans that are completely tax free if repaid as agreed. (Interest payments will be required, but they will be credited to the account.)  In a major emergency, a hardship withdrawal may be permitted, subject to income tax and, usually, a 10% penalty as well.

Borrow?

At first glance 401(k) loans may look particularly appealing. After all, you make those payments of principal and interest to yourself. However, if the interest that you pay is less than your borrowed dollars would have earned in the plan, you will slow the growth of your retirement nest egg. Moreover, you pay with after-tax dollars—replacing your original tax-deferred contributions.

Loans must be repaid in no more that five years. (Fifteen-year terms are allowed for loans to purchase a home.) If you leave your job before a loan is repaid, you’ll have to pay it off, or the open balance will be considered a premature withdrawal subject to income tax and penalty.

Potentially more serious yet, the burden of loan payments may make it impossible to continue your 401(k) contributions.

Withdraw?

It’s not easy to make a hardship withdrawal from your 401(k) account. You must show an “immediate and heavy financial need” for: medical expenses not covered by insurance; the purchase of a principal residence; postsecondary tuition; or to avoid eviction from or foreclosure on a principal residence. Many plans also include funeral and child support expenses. You also must show that you have no other resources reasonably available to meet these costs. This means that you first must fail to qualify for a plan loan. Once you take a hardship withdrawal, you will be barred from contributing to your plan for at least 12 months.

Pay now or pay later

To examine the effect of these options, let us compare the long-term results for Nancy Needful, a hypothetical 35-year old worker with a $30,000 balance in her 401(k) plan. Nancy contributes $150 monthly to her account. Faced with a sudden emergency need for $10,000, Nancy has three options.  Nancy can:

  1. Take a loan of $10,000 from her plan at an 8% interest rate and cease making contributions until the loan is repaid in five years, making monthly payments of $202.76, and resuming her $150 contribution after five years.
  2. Make a hardship withdrawal of $12,500 to provide the cash that she needs and cover her income tax and penalty, resuming her participation in the plan after one year.
  3. Obtain a $10,000 advance on an inheritance, continuing her participation in the plan.

Here’s how those choices will play out:

The long-range cost of raising $10,000
Reduced plan accumulations

 At age 55At age 60At age 65
Loan$199,384$310,352$470,186
Withdrawal$166,609$259,317$397,437
Advance$236,007$362,709$551,476

As we see, by taking the advance on her inheritance and continuing plan contributions, earning a moderate 8% return (high today, but average in the long term) on her investments, Nancy ends up at age 65 with 17.4% more than if she had taken the loan and fully 38.8% more than with the withdrawal.

The lesson: tapping into your retirement plan assets should be your very last resort.

© 2018 M.A. Co. All rights reserved.
Any developments occurring after January 1, 2018, are not reflected in this article.