For Clients, Advisors and Community

In my 32 years of practice, I have watched my clients age, enjoying long years with their children and grandchildren. In our senior care (elder law) practice, I am increasingly counselling my clients about long term care issues including, the transition from independent living to getting assistance whether it be with medications, getting to and from their doctor appointments, daily errands and the activities of daily living (including dressing, toileting, eating and other basic daily activities). Recently, I have experienced this dilemma in my own family.

In the 1990′s, assisted living facilities came into vogue on a stand alone basis or, more often, as part of more comprehensive long term care communities (including perhaps acute and skilled nursing care facilities). In an assisted living facility, each individual (or couple) has his or her (or their) own small apartment and typically takes meals in a community dining room or can make small meals themselves. There is 24 hour supervision, medication assistance, daily activities, a shuttle bus to and from local shopping and often other services available on an a la carte basis. The 2011 MetLife Market Study revealed that the average cost of assisted living in Illinois is $3,490 per month.

Many people think that assisted living care is covered by Medicare. Generally, it is not. Expenses for long-term care (caregivers, medication management and the like) for individuals that are living in the community (not in a hospital or in a nursing home) are not covered by health insurance programs. Individuals who have purchased long term care insurance and who need help with two or more ADLs (activities of daily living described above) may qualify for benefits if they need to live in an assisted living residence for that reason.

A recent Wall Street Journal article describes many families who have been frustrated by the care for their loved ones received in an assisted living facility. They describe a low ratio of caregivers to residents and long response times when they need help.  (In my experience, there are a few really good facilities in the Chicago metropolitan area that offer services from people who care. Nonetheless, I have heard the complaints of my clients’ loved ones about uncaring personnel, attitudes bordering on abusive behavior on the part of the staff, bad food and occasionally, medication mistakes at some facilities.)

The WSJ article describes some families who have started to look for long term care solutions offshore. For the same cost of a small apartment, some families have been able to secure a luxury residence in Costa Rica shared by three patients including a nurse, three staff members and a chauffeur. There was a community of U.S. citizens, they were able to go to church every Sunday and have a full life there. The family reports that they paid about the same cost as assisted living here, including the cost of childrens’ travel back and forth to visit the parents regularly. It’s certainly an “out of the box” solution.

As we baby boomers, and our parents, age, we will need to develop creative solutions to keep us happy as we live longer. Here’s one alternative.

For Clients, Advisors and Community.  In March and May, 2011, I wrote blog articles about the asset protection aspects of inherited IRAs. This article describes current developments involving tax aspects of inherited IRAs. What is so important about inherited IRAs?

With careful planning, the beneficiary of an inherited IRA (typically a child) has the opportunity to defer income taxes (with tax-deferred growth) over his or her lifetime. Many refer to this as the “stretch IRA”. It is a significant income tax savings tool, particularly for individuals who have large IRAs, or for whom tax deferred monies constitute a large portion of their estate.

In some cases, without proper planning, the child or grandchild (and sometimes the spouse if the planning is done incorrectly) only has five years to withdraw all the money from the IRA. This is called the “five year rule”. This accelerates all the tax payment. The government gets its money at once. There is very little opportunity for tax-deferred growth.

The highway bill, which is currently moving through Congress, contained a provision removing the “stretch IRA” and implementing the five year rule for everyone. That would raise $4.6 billion over the next decade.

In recent weeks, there was an extensive campaign by members of the Financial Services Institute (your financial planners) which put extreme pressure on Congress, especially the Majority Leader of the Senate, Senator Harry Reid. Last week, Senator Reid removed the offending provision from the highway bill thereby leaving the current “stretch IRA” provisions in force.

The national experts in the field think that the Congress may revisit the matter. Who knows what is going to happen when the government is looking under every rock for revenue!

Strategy: If you or a family member is the beneficiary of an account or benefit in a profit sharing, 401(k), or pension plan where the employee has passed away, it will be important to do an inherited IRA rollover as soon as possible. You need to consult a financial planner or investment advisor who is familiar with the rules, as well as a tax attorney to ensure that the IRA is coordinated with your estate plan. The rules are complicated. You need to find individuals who are fully trained in the required minimum distribution (RMD) and trust rules.

Taxation of Inherited IRAs is one place the Congress may go looking for revenue. There is a possibility that the stretch IRA may become a thing of the past; I doubt it because there will be another uprising. Nonetheless, it makes sense to plan now.

The deduction limits for most company (and sole proprietor) retirement plan contributions increased for the first time in three years!

Highlights include:

• The participant salary deferral limit increases to $17,000.
• The salary deferral “catch up” limit for participants over 50 remains $5,500.
• The total maximum defined contribution for any one participant increases to $50,000.  If the participant is over age 50 and maximizes salary deferrals, it is $55,500.
• The defined benefit plan maximum benefit amount increases to $200,000.
• The maximum considered compensation in a retirement plan for 2012 will be $250,000.
• For Defined Benefit plans, the retirement benefit limit increases to $200,000.

The Social Security Administration has separately announced that the taxable wage base for 20121 is increased to $110,100.

See our more document here: comparing IRS-approved retirement plan contribution limits for 2011 and 2012.

NOW is the time to consider: 

• Tax deductions and contributions for 2011; and
• Planning for salaries and deferral contributions for 2012
• Companies desiring to implement a new retirement plan for deduction in 2011 have an implementation deadline of December 31, 2011.

Please call Jay Kaufman or Kim Kaskel with your retirement plan questions at 847-521-4900.

For Clients, Advisors, Community

A recent published case emphasizes the importance of clients checking their beneficiary designations of their retirement plans including; profit sharing, 401(k) and pension — on a regular basis. The general rule is that if the participant is married, he or she must name his or her spouse as beneficiary (unless the spouse signs a waiver in the presence of a notary or a plan representative).  This law is to protect the interest of spouses.

Here is a good example of where problems with unchecked beneficiary designation can occur: After his first wife passed away, the plan participant named his three adult children as his plan beneficiaries.  Subsequently,
he remarried. He never changed the beneficiary on his plan accounts. His intent was that his three adult children become the beneficiaries of his retirement plan account. No spousal waiver was executed. Six weeks after he remarried, he died. His new wife and his three adult children both made claim for his 401(k) account balance.

The plan administrator filed suit asking the court for directions on who was the rightful beneficiary. The court awarded the account balance to his wife because no waiver had been signed. This was not the participant’s intention!

This litigation occurred in Federal District Court. These situations can be messy, cause family disharmony and are extremely expensive.

The lesson is clear: Double check your beneficiary designation on an annual basis. Make sure that it is properly coordinated with your estate plan and structured to defer income taxes as long as possible. This is a simple step. The retirement plan account is sometimes the largest asset in the estate.

We are increasingly finding the need to stay on top of these changing circumstances.  So, it makes sense to pay attention and review the plan every year.   We have developed a program which provides annual review and estate plan enhancement every that helps our clients ensure that these problems do not occur.

There are new techniques, particularly for larger plan benefits or IRAs which allow the family to “stretch” the benefits deferring taxes over an extended amount of time. We often discuss this topic with our clients during their annual estate plan enhancement meeting. For more information, call us.

For Clients, Advisors & Community

In an earlier article, I discussed what a civil union is and how Illinois law affects spouses in a civil union under the new law.

There is a major disconnect, however between the Illinois civil union law and Federal law.  Illinois recognizes civil unions.  Because of the Defense of Marriage Act (DOMA) (defining marriage as a union between a male husband and a female wife only), Federal law does not generally recognize the civil  union.  (There is currently extensive litigation concerning DOMA.  It might or might not be struck down by the Supreme Court.   The Obama administration has taken the position that it will no longer defend DOMA.  For purposes of this article, we  assume that DOMA is still the law of the land.)

Income Tax:  A couple whose union in registered under Illinois’ civil union law should be able to file a joint income tax return, at least in Illinois.  However, that’s not the case.  No joint filing is allowed for unmarried couples under Federal law for filing Form 1040.  The Illinois tax is based on the adjusted gross income of the Federal 1040. So, there is no benefit to a civil union for individual income tax purposes.

Estate Tax: In the eyes of the Federal law, a couple united under Illinois’ civil union law is not married.  So, they cannot take advantage of the unlimited marital deduction that allows a spouse to leave upon his or her death, an unlimited amount of money to the surviving spouse, free of estate tax.  This would allow deferral of any estate tax to the death of the second spouse to die.  (I should comment, however, that for 2011 and 2012, at least, this affects only individuals whose gross estates exceed  $5,000,000).   As a result, spouses of a civil union have the risk of paying estate tax at the first to die where this would not be the case if they had a traditional marriage.  This is a very big deal because it will cost tax money at the death of the first partner to die and could cause significant reduction in the inheritance available to the survivor!

Gift Tax: The same is true with the gift tax.  Each spouse may make an unlimited amount of  gifts to his or her spouse during his or her lifetime.  Since Federal law does not recognize the  spouse under an Illinois civil union, there is no unlimited gift tax marital deduction.  (Again the same comment regarding the $5,000,000 lifetime exemption applies).

Qualified Pre-Retirement Survivor Annuity (QPSA): Many retirement plans require that the automatic beneficiary of the employee’s retirement plan account is the “spouse”.   This law was designed to protect spouses.  Many plans also require that if the employee names a beneficiary other  than the spouse, written spousal consent is required.  This is a Federal law.  Although there has been no firm guidance,  most practitioners think that the QPSA will NOT apply to an employee who has entered into a civil union.  Hence, it  is very important that the employee have a carefully drafted beneficiary designation which makes his or her intentions known concerning the beneficiary of his or her retirement plan benefits.

Social Security Benefits: Here is an area where an anomalous result will be most interesting to seniors.  Once again, Federal law does not, at the present time, recognize Illinois civil unions.   These aspects of the law can bring about an interesting result.  An example explains it:

Art was married to Beverly.  Art died at age 70.  Beverly continues to receive the survivor portion of his social security benefits.  Two years later, Beverly meets Charlie, a widower age 73.  They are thinking about moving in together and getting married.  Beverly knows that if she marries Charlie, she will lose about $1,500 per month in the survivor benefits she is receiving from social security.  However, after consulting us, Beverly and Charlie realize that if they enter into a civil union (where they get most of the benefits under Illinois law), Beverly will continue to receive the survivorship social security benefits from her deceased spouse because Federal law does not recognize the Illinois civil union as a “marriage”.  The difference in  planning could be significant!  Here, the couple is far better financially by choosing the civil union route.

There are many different considerations in choosing a civil union as opposed to a traditional marriage.  Sometimes the results can be surprising.  Couples contemplating a civil union need counsel so that they fully understand the consequences of their actions before taking that big step.

For Clients, Advisors & Community

On June 1, 2011, legislation establishing civil unions went into effect in Illinois.  This is a major step in marital rights for gay and lesbian couples.  What’s interesting, however, is that the law potentially impacts, perhaps in a major way, heterosexual couples as well.

This article will outline the features of the new law as well as its impact on some of our clients and their families.  A follow-up article will discuss the choice of civil union versus marriage and the tax and benefits issues relevant to civil unions.

What is a civil union?  A “civil union” is a legal relationship between two persons of either the same or opposite sex.  It excludes relationships involving more than two people.  The parties to a civil union in Illinois are “spouse”, “family”, “immediate family”, “dependent”and  “next of kin”.

There’s a set procedure in Illinois for a civil union to be valid.  It requires a license and a certificate be issued, much like a marriage.  The Illinois law recognizes civil unions legally entered into in another state. It does not apply to common law marriage.  It also allows issuance of licenses and certificates for civil unions to individuals who live in or intend to live in another state,  as long as that jurisdiction does not have its own law prohibiting civil unions.

Many laws that apply to a married couple apply to unions under the civil union act including separation, divorce, alimony, custody, child support, inheritance, right to take a minimum share under will, right to make health care decisions and right
to visit in a hospital.

Also, under the Illinois Spousal Continuation Act, a spouse and dependent children who lose health care coverage due to the death or retirement of the employee (or due to divorce of the employee) are entitled to continuation of coverage under certain circumstances.  It appears that the civil union spouse of an employee would be entitled to this benefit.

This is by no means a comprehensive list of benefits available.  Suffice it to say that there are many benefits
available to a spouse under the new civil union law in Illinois.

There are some questions, burdens, and responsibilities that come along with being a “spouse” under the new law.  First, under the Family Expense statute, married couples are responsible for family expenses including, in particular, medical expenses.  A spouse under the civil union law would be responsible for the medical expenses of his or her spouse under this statute.

In addition, the law concerning “tenants by the entireties” protects a husband or wife from a creditor taking their home due to a judgment against the other spouse.  However, the law in this case specifically states, “husband” or “wife”.  Hence,  unions under the civil union law do not at this time appear eligible for protection as tenants by the entireties.  Once the legislature changes the statutory language from “husband and wife” to “spouse”, this benefit might become available.

Because of the (Federal) Defense of Marriage Act, there is a “disconnect” between Federal law and Illinois law when it comes to taxes and certain Federal benefits.  These significantly impact the decision, particularly of whether an older same-sex couple should choose the traditional marriage route or a civil union.  I will address these and other related concerns in the follow-up article on civil unions.

For Clients, Professional Advisors

Since my March 3, 2011 posting on inherited IRAs, there has been an interesting precedent. A Federal Court in Texas has issued an important appellate decision. The case is Chilton v. Moser.

What happened? Shirley died in 2007 naming Janice as beneficiary of her $170,000 IRA. Janice opened an IRA titled, “Janice, beneficiary of Shirley IRA” and transferred the funds to this account. Janice filed a bankruptcy petition in December, 2008. Janice sought to protect the IRA from the bankruptcy estate, claiming that the assets were exempt from her creditors under Federal law. The United States Trustee objected. The bankruptcy court judge held that the assets were part of the bankruptcy estate and that they could be distributed to the creditors. Janice appealed to the Federal District Court.

In a well-reasoned appellate decision, Judge Ron Clark reversed the bankruptcy court decision. He held that in order for inherited IRA funds to be exempt from creditors in a bankruptcy (a) they must be tax exempt under §401 or §408 or §403 (or other) section of the Internal Revenue Code (covering individual retirement accounts, pension and profit sharing plans and certain non-profit organization annuity plans) and (b) they must be retirement funds.

The court went on to conclude that Shirley’s funds were both tax-exempt and were retirement funds. Therefore, the exemptions under the bankruptcy code applied and the money was in fact Janice’s. Her creditors in the bankruptcy case would be unable to reach them!

Can Illinois residents rely on these cases? The trend of the decisions is clear. All Federal District Court Decisions to date and one Appellate Court decision has been consistent with the holding in Chilton v. Moser.

However, one cannot say for certain that this is the law of the land. There is some likelihood that the Federal appellate courts will differ in how they apply the bankruptcy code to IRAs. Nationally respected IRA and tax expert Bob Keebler recommends that professionals continue to offer clients an individualized IRA trust for asset protection. It provides certain asset protection.

Until the matter is resolved by the Seventh Circuit Court of Appeals (Illinois, Wisconsin and Indiana), or if the circuits disagree, by the United States Supreme Court, we continue to offer our clients with large IRA accounts an individual retirement plan trust that provides the asset protection they need.

Why take a chance if a deal goes bad?

For Professional Advisors, Clients, Business Owners

Asset protection is an increasing focus in our practice.  In its March 4, 2011 Tax Letter, Kiplinger gave the impression that inherited IRAs are exempt from creditors and in bankruptcy, citing an Arizona case.  For now, that’s not the case in Illinois.  Allow me to explain:

In the case cited by Kiplinger, Kay Theim and her husband filed for bankruptcy.  While the bankruptcy was pending, Kay’s mother died, leaving her $10,032.57 as beneficiary of an IRA.  Mrs. Theim wanted to keep the IRA.  Who wouldn’t?  So, she amended her bankruptcy petition, seeking to have the inherited IRA exempted from her bankruptcy estate.  The bankruptcy trustee objected and the litigation progressed.  In a 21 page opinion, the United States Bankruptcy Court in Arizona held that the IRA was exempt and that Mrs. Theim could keep the IRA money.

What would happen if Mrs. Theim lived in Illinois?  Illinois has a statute that states that all IRAs and qualified retirement plans (401(k) plans, profit sharing plans, defined benefit plans) are exempt from attachment by creditors and are outside an individual’s bankruptcy estate. Meaning… One would hope that the beneficiary of an IRA would be awarded the same protections that an IRA accountholder would have. 

Unfortunately, in Illinois, Mrs. Theim might be out of luck.  A 2006 bankruptcy case, In re Taylor is the only case applying Illinois law.  The court summarily decided that a contributory IRA or rollover IRA and an inherited IRA were different because one cannot roll over an inherited IRA.  Thus, an inherited IRA is not the same as a contributory IRA and is not protected.  This ruling is controversial.  I’m certain it will be challenged in cases soon to come.

In the meantime, it will be important to consider asset protection planning for non-spouse inherited IRAs in Illinois.   This requires coordinated planning among the client’s professional advisors including his or her attorney, investment and/or insurance advisor and accountant. 

It’s 10:30pm as I write this.  Do you know if your inherited IRA is protected from creditor attack? 

Do you think that inherited IRAs should be exempt from creditors?

(Case and statute citations are available by contacting me).