A couple should create an appropriate estate plan. If they truly want inheritance rights, they need to execute testamentary documents, such as wills.
For unmarried couples, having an estate plan might be even more important than for married couples, especially if there are children in the family. The unmarried couple does not enjoy the legal protection afforded by marriage, but many of these protections can be had through a well-prepared estate plan.
People are living longer and are having children later in life. Due to this combination of demographic factors, many more people are in the “Sandwich Generation.” Someone in the Sandwich Generation has elderly parents while they still have minor children. All too often, they are torn between their caregiving responsibilities for their children and for their parents. Here is an article regarding the Sandwich Generation which may be of interest.
If you’re part of the Sandwich Generation, how do you alleviate some of your stress?
Planning is one of the best tools.
Regardless of whether you’re single or married, divorced or widowed, a parent or not, you need an estate plan, particularly if you are over the age of 60. This is true for men and women, but women face some challenges that make it even more important to start planning even sooner.
Women typically live longer, they’re more likely to be custodial parents and they approach retirement differently than men. In general, women tend to be caregivers – worrying about everyone else but themselves – but when it comes to estate planning, it’s more important that they care for themselves first.
If Your Income Depends on Others
One key aspect of estate planning women will often overlook is what will happen when their husband, parents or other relatives die. According to the U.S. Census Bureau, 36 percent of women 65 and older are widowed, compared to 12 percent of men 65 and older.
If you are dependent on someone either financially or emotionally, what happens if something happens to them, if they are disabled or they die?
For example, if a husband starts to receive his pension payments, but chooses to get the maximum benefit in his lifetime — it means the benefits will end at his death.
If he predeceases her, she has nothing. However, if she’d planned for that 20 years prior to his death, there might have been ways to avoid this.
Here is another common scenario. A businessman with significant wealth, will often put his business advisers in charge of his estate plan, rather than his wife and/or children. Yes, the advisers would have a fiduciary duty to the wife upon his death, but they’d have all the power to make decisions about what would be sold, how it would happen, and how it was valued.
For a lot of women, the key is to start planning early. Have discussions with your spouse or family members and set things up with longevity in mind.
Start talking to your family about what their estate plans are. For example, if you’re a caregiver for a parent, talk to your siblings and parents about the potential implications of that: Does your time caregiving have implications for how your parent’s estate is divided?
Plans Will Vary
Your estate-plan focus will vary depending on your situation. Are you married or single? Children or no children?
For a single woman without children, the most difficult decision is going to revolve around who will take care of you, in the event an illness incapacitates you, and who will make your medical and financial decisions.
For married women with children, often the first two estate-planning concerns are naming a guardian for the children and planning for income replacement through life insurance.
For women who are widowed, key considerations include making sure their estate plan has been revised to reflect the husband’s death and to assess whether there are different financial-planning opportunities and challenges to consider.
A first step for anyone who’s gone through a divorce is to check the beneficiary designations on retirement and other financial accounts. Often people will walk away from their spouse, but then never do any of the cleanup work.
Women who remarry or those who come to a marriage with significant assets, should think carefully about their estate plan before tying the knot.
Women tend to be hesitant to discuss their net worth going into a new relationship, but that can be a big mistake. If they keep control of their assets separately, if they divorce, the new spouse won’t have access to that money.
In Washington, a spouse of someone dying without a Will gets 100% of the Community Property and 50% of the deceased's separate property. If the spouse dies with a Will, the Will language controls. However, not all assets pass under the Will. Some pass by beneficiary designation (think life insurance and IRA) and some by joint tenancy with right of survivorship (think checking/savings accounts).
There are a couple of ways to forestall that issue, though none are ideal.
One tactic is to make sure beneficiary designations on retirement plans are set such that your children or other heirs inherit — but those designations need to be in place before you get married. Changing beneficiary designations after you get married may be difficult, because some financial-services firms won’t allow changes that entail disinheriting a spouse without the spouse’s consent.
Another solution is to set up a trust, naming a child or other relative as the recipient, and put assets into it before you get married. You can still borrow from the trust, but the husband will not have access to that money if you die.
Women who remarry should realize that any assets they brought to the marriage are on tap to pay for the new spouse’s medical bills — that includes nursing-home care, which can quickly drain one’s resources. It doesn’t matter whether you’ve been married two days or 50 years, the spouse will have to pay for medical care. Your assets are going to be on the line for their medical care, and you can’t get around that.
Women who bring a significant amount of money to a marriage should consider protecting their assets by purchasing a long-term-care policy for her spouse, setting up a trust before the marriage, and working with an attorney prior to the marriage.
Estate Planning is Important
The prospect of estate planning can be overwhelming. The first hurdle is simply facing the fact of death. The next hurdle is trying to get a handle on complex topics that are often difficult to understand. Then there’s the question of finding and hiring an attorney.
No matter what your age or how much money you have, consider getting these items into place:
At Tacoma Elder Care, we are always working on ways to help you. If you are just beginning to think about your planning, we highly recommend attending one of our FREE workshops to learn more about how to start, and the most important documents everyone needs to have in place. Contact us today to register, or to schedule a FREE consultation.
Based on tax treatment and required minimum distribution rules, these are the three best and four worst beneficiaries to name for your individual retirement accounts.
Individual retirement accounts are some of the most sensible investment vehicles. They are tax deferred, protected from most creditors and can easily be transferred to a beneficiary outside of probate. In addition, they do not have a true maturity date: For traditional IRAs, you have to take required minimum distributions (RMDs), mandatory withdrawals of a certain percentage of the account every year, starting the year after you reach age 70 and increase as you age.
The major sticking point is what happens to these accounts upon your death: How can your beneficiaries optimize tax deferral and continue creditor protection? Who you leave these accounts to and how you leave them can either make or break these objectives?
The following beneficiaries are the best options when it comes to passing on your IRA:
Your Spouse. When you die your IRA typically turns into an inherited IRA. This creates different RMD treatment than when you take the distributions as the owner of the account. The main exception to the inherited IRA issue is transferring IRAs to your spouse.
Your spouse is the only individual who has the option of transferring your retirement plans to his or her name at the time of your demise. If the surviving spouse is younger than the deceased spouse, the receiving spouse now uses their longer life expectancy, and the commensurate smaller required withdrawal percentage, for RMD purposes. This allows for smaller distributions, which means less taxable income and more funds to continue growing tax deferred.
Younger Individuals. The concept of stretching RMDs is somewhat misrepresented to the public and is contingent on whether you live past April 1st of the year following the year you reached age 70. This is the actual time you must start taking RMDs or face a penalty. If you die before this time, meaning no one has ever taken an RMD from your IRA, your beneficiaries can stretch RMD distributions based on their life expectancies.
This is a great benefit to younger individuals: Though they have to take RMDs even if they are younger than 70 years old (inherited IRAs must begin distributing by December 31st of the year after your death, no matter how old the beneficiary is), the percentages to withdraw are quite small based on the beneficiaries' long life expectancies. If you die after the required begin date, RMDs are based on the longer of either your life expectancy or your beneficiary's life expectancy.
A See-Through Trust. Leaving funds to an entity that is not an actual human, such as an estate or charity, completely ruins RMD optimization: The beneficiary must withdraw all funds within five years. This can lead to an income tax burden that you would have wanted your beneficiaries to avoid.
A see-through trust can receive RMDs based on the beneficiary's stretching abilities noted above (thus it "sees through" to their life expectancy) yet protect the proceeds by holding the funds in trust. This is particularly useful when a minor is the beneficiary of a trust, since a minor cannot receive these distributions outright because they cannot individually own property. A see-through provision is often just one component of a trust, meaning it is often just one part of a larger document.
The following beneficiaries are the worst options when it comes to passing on your IRA:
Your Estate. Naming "my estate" as beneficiary to your IRA is the absolute worst thing you can do: You potentially lose creditor protection of the IRA, ensure the five-year withdrawal rule for your beneficiaries, increase court and accounting costs and increase the time and complexity of your probate estate.
Both A Person and a Non-Person. All beneficiaries to a trust must have a life expectancy (i.e. be human beings) or else the five-year rule for distributions applies. This mistake is usually made when an IRA owner leaves a large amount of the plan to family members and a small amount to a charity, such as 90% to children and 10% to a church. Remember that all the IRA funds must go to natural beneficiaries for stretch RMD purposes: Even leaving just 1% to a non-person invokes the five-year rule.
One way around this shortfall is to move some funds to a separate IRA and leave that IRA solely to charity. This will benefit all parties: The charity receives all the funds in its IRA tax-free, and your beneficiaries receive inherited IRAs with stretch RMD treatments available to them.
An Older Person. Leaving IRAs to an older individual is clearly bad for RMD purposes since the distributions are withdrawn at a higher rate. Of course, if you want to leave some funds to an older person and have no other assets to transfer, then RMD treatment might not really be a major concern for you. However, if there is a choice to transfer non-retirement assets instead, then those would be preferable.
A Spendthrift or Person with Creditor Issues. Spendthrift beneficiaries who receive IRA funds are disasters waiting to happen. Remember that every penny taken out of an IRA, inherited or otherwise, is taxable income. Therefore, a person in financial straits would not only deplete an inherited IRA quickly but would also have to pay income taxes for every withdrawal. In addition, in 2014, the Supreme Court decided an inherited IRA is fair game for creditors during bankruptcy judgments.
Instead of making your spendthrift relative the outright beneficiary of your IRA, consider naming a see-through trust and have another family member act as its trustee.
As is often the case in estate planning, knowing the nature of the asset itself is usually not enough: You should know the future nature of the asset and the individual who shall be receiving it.
At Tacoma Elder Care we help you understand the importance of estate planning, paying for long term care without going broke, asset protection, and life planning.
Having a life care plan is essential in protecting you or your loved ones’ future!
Consider attending one of our FREE Workshops to begin planning today! Contact us to register or to schedule your FREE consultation.
Love may be sweeter the second (or third) time around, but for a growing number of baby boomers, love and marriage don’t go hand in hand.
The number of adults older than 50 who were living together outside of marriage more than doubled between 2000 and 2010, from 1.2 million to 2.75 million, according to the Journal of Marriage and Family. It’s not fear of commitment that keeps older couples from making their unions official, but the fear that marriage will saddle them with higher health care costs, wipe out retirement benefits, raise their taxes and disrupt estate plans.
Despite all that, marriage conveys 1,138 tax breaks, benefits and protections (such as guaranteed medical leave to care for a family member), according to the Human Rights Campaign.
Regardless of whether you are contemplating marriage or just moving in together, put romance aside long enough to consider these issues later in life.
Sharing costs and assets
Living together means either you start fresh in a new place or one of you moves into a partner’s home. The latter isn’t unusual for older couples, but unmarried couples need to take extra steps to protect their interests. For example, if one partner isn’t on the deed, their property may not be protected by the homeowner’s insurance.
You may also be ineligible to deduct a share of the mortgage interest on your taxes. This isn’t an issue for married couples who file jointly, even if only one spouse is on the deed, and if the relationship ends you will still have legal rights. That’s why for older, unmarried couples, making a cohabitation agreement isn’t just a good idea, it’s a necessity. Older partners often own homes and have investment portfolios and other assets; they may also have adult children who aren’t thrilled about their parents’ living arrangements. If the relationship fizzles or one partner dies, what seemed like an uncomplicated partnership could turn into a messy legal nightmare.
An attorney with experience in counseling unmarried couples can help come up with an agreement that will govern the arrangement and address potential conflicts. For instance, if one member of the couple owns the house, the agreement would spell out whether the nonowner will contribute to the mortgage (if there is one) and other home-related costs. If the nonowner doesn’t contribute, the couple might include language that states that he or she isn’t obligated to reimburse the heirs for those costs after the owner dies. The agreement can also state that if the owner moves into a nursing home, the partner can remain in the home.
If you and your partner decide to buy a home together, a cohabitation agreement should spell out the amount each will contribute to the cost of buying and owning the home. Think of it as a business investment, in which the more you invest, the more you own. You can also use the cohabitation agreement to spell out how you’ll split other expenses, such as groceries and household goods, utilities and travel costs.
Your cohabitation agreement should address what will happen to the home if you break up. Will one partner have the right to buy the other out? Will you sell it? Similarly, if one partner dies, does the survivor have the right to buy out the deceased partner’s share from the estate? The agreement also lets you address what should happen to other property in the event of a breakup—particularly property you owned before you got together.
To reduce conflicts, it’s recommended that both partners hire their own lawyer to draft the cohabitation agreement. That way, in the event of a contentious breakup, one partner can’t claim that he or she didn’t understand the terms of the agreement. Whenever possible, the children should be involved, too. Including adult children will reduce the likelihood that they’ll challenge the terms of the agreement.
If children refuse to participate, partners should consider videotaping a statement in which they outline the terms of the agreement. This can be used to demonstrate that they were competent when they signed it.
Sorting out estate plans
How marriage affects estate plans is a common concern among older couples, who are likely to bring property and other valuables into the relationship and want them to go to children from previous marriages. Once you get married it becomes very difficult to separate your assets.
For unmarried couples, making a will is paramount, especially if they are sharing a home owned by just one member of the couple. If the homeowner dies without an estate plan, the other member of the couple could be out on the street.
For partners who want to leave their homes to their children, one way to deal with this problem is to create a life estate for the surviving partner. This contract typically gives the survivor the right to live in the home until he or she dies or moves into a nursing home, at which time the house passes on to children or other heirs. In some cases, the agreement will set aside money to cover maintenance and other expenses.
Although some couples remain unmarried to protect their estates, that strategy backfires if you end up paying estate taxes. If you’re married, you can inherit an unlimited amount of assets from your spouse without paying state or federal estate taxes. You can also give an unlimited amount of assets to your spouse while you’re alive without filing a gift-tax return.
The tax code also favors married couples when it comes to inherited IRAs. A spouse who inherits an IRA can roll the account into his or her own IRA. The surviving spouse can postpone taking required minimum distributions until age 70½. In the meantime, the account will continue to grow tax-deferred.
The same option isn’t available to unmarried partners. However, an unmarried partner who is named as an IRA beneficiary can minimize taxes by rolling the account into an inherited IRA and taking distributions based on his or her life expectancy.
Preserving your benefits
Many older couples decide not to get married because they don’t want to lose spousal Social Security benefits or a former spouse’s pension.
Divorced spouses are eligible for Social Security benefits based on their ex-spouse’s earnings record as long as the marriage lasted for at least 10. That’s a valuable benefit for women who left the workforce to care for children or aging parents and have limited benefits of their own. They’ll lose that benefit, though, if they remarry.
Widows or widowers who remarry before age 60 lose survivor benefits based on their deceased spouse’s earnings. Most widows receive a higher benefit by claiming their husband’s monthly benefit instead of their own. If your second marriage ends in divorce or your spouse dies, you have the right to reapply for benefits based on your first spouse’s earnings.
Unless the divorce decree says otherwise remarriage will end alimony payments from a former spouse.
Remarriage could also mean losing a deceased spouse’s pension benefits or other types of survivor benefits, such as annuities paid to spouses of police officers and firefighters.
Weighing the tax bite
In recent years, Congress has tried to make marriage less taxing for couples. Many young couples who tie the knot pay less in federal income tax than they would if they had stayed single. If both spouses are in the 28% or higher tax bracket, however, their combined income could trigger a marriage penalty.
The marriage penalty is particularly punishing at the top, 36.9% bracket. That bracket kicks in for single taxpayers once their income exceeds $413,200; for a married couple, the top rate is triggered once taxable income tops $464,850. A couple (or individual) in the top bracket must also pay a 23.8% tax rate on dividends and long-term capital gains instead of the 15% that most taxpayers pay.
Married couples, including those with relatively modest incomes, could end up paying higher taxes on Social Security benefits than their unmarried counterparts. Taxes on Social Security benefits are based on what’s known as your provisional income: your adjusted gross income (including pension payouts and retirement-account withdrawals but not counting Social Security benefits) plus any tax-free interest and 50% of your benefits. For singles, taxes don’t kick in as long as the total is below $25,000. That means an unmarried couple could have combined provisional income of up to $50,000 without paying taxes on their Social Security benefits.
For married couples, however, the hammer comes down once their combined provisional income tops $32,000. The disparity continues up the income ladder. Married couples with provisional income of more than $44,000 will pay taxes on 85% of their benefits; two unmarried partners could have combined provisional income of up to $68,000 before paying tax on 85% of benefits.
Singles who live together have another advantage over married couples when it comes to taxes: flexibility. Say one member of the couple makes a lot more than the other. In that case, the high-earning member of the couple could pay the mortgage and deduct the interest (assuming he or she is liable for the debt and has an ownership interest in the home), and the other could take the standard deduction. Or the low earner may fall below the income limit for contributing to a Roth IRA, in which case he or she could fuel the account even if the high-earning partner couldn’t.
But unmarried couples could pay higher taxes when they sell a home. Married couples can exclude up to $500,000 in capital gains on the sale of a home as long as at least one spouse has owned the home and both have lived in it for two out of the five years before the sale. For an unmarried couple to qualify for up to $500,000 of tax-free profit, both individuals must be on the deed and have owned and lived in the home for two of the five years before the sale. If only one meets that standard, the exclusion is capped at $250,000.
College costs. Another drawback to marriage is that it could affect your college-age children’s eligibility for financial aid. The Free Application for Federal Student Aid (FAFSA), which is used to determine how much financial aid a child will receive, counts the income and assets of both spouses, even if only one is the child’s parent. As long as they were married on the date the parent files the FAFSA, the government will count the stepparent’s financial resources (even if he or she declines to contribute to college costs).
If the couple is unmarried, the live-in partner’s assets and income aren’t counted, as long as the partner isn’t the child’s biological or adoptive parent. However, any financial support provided by the partner—which includes living expenses, gifts and loans—must be reported on the FAFSA as untaxed income to the student. If both parents live together but aren’t married, they must report their income and assets on the FAFSA. Marriage isn’t always a negative where financial aid is concerned. If both partners have children, marriage could increase the size of the household and the number of children in college, which could increase eligibility for financial aid.
In sickness and in health
The high cost of health care—particularly long-term care—can create one big disincentive for older couples to get married. Once you wed, you are responsible for your spouse’s medical debts. If your spouse ends up in a nursing home, the cost could deplete your estate.
Medicare doesn't cover most nursing home care, and married couples’ combined assets are counted when determining eligibility for Medicaid. The spouse who remains at home is generally allowed to keep a certain amount of “countable assets” along with certain exempt assets, such as a car. An unmarried partner’s investments, savings and other assets usually aren’t counted at all unless they’re jointly owned.
At Tacoma Elder Care, we are always working on ways to help you. If you are remarrying or newly single, and you are over the age of 50, it’s highly recommended you get some advice on all the pros and cons for your specific situation.
We highly recommend attending one of our FREE workshops to learn more about how to start, and the most important documents everyone needs to have in place. Contact us today to register, or to schedule a FREE consultation.