The Law of Unintended Consequences – and Failure to Plan.

According to a recent story in the Boston Globe, Marcelle Harrison’s family has lived in a three-story home in Cambridge, Massachusetts for almost 40 years, during which time four generations of her family have lived. She and her family (two generations worth) may have to vacate the home because her stepfather died intestate (without a will) in 2011 after the passing of her mother two years earlier, meaning that legally her stepfather’s blood relatives back in his native country of Barbados have a stronger legal claim to her childhood home than she.

The home was purchased by her mother and step-father in 1980 for $23,000. It is now worth over $1 million. When her mother died in 2009, her step-father continued as the sole owner of the property. When he died in 2011, without naming a beneficiary for the property, Massachusetts law allows his blood relatives to claim the house over Marcelle, a stepchild.

According to Marcelle and those close to the family, her stepfather, Noel Aimes, always wanted the house to stay in the family, and in the 1990s he built additions to accommodate his growing family.

Marcelle received the news in a letter delivered to her shortly before the end of last year. “Since you were not an heir-at-law, your appointment is in jeopardy of being set aside,” wrote the state public administrator. It appears that Mr. Aimes’s relatives in Barbados plan to sell the property as soon as the estate is settled. Marcelle is terrified and unsure where her family will live if forced out of the Cambridge property.

This story illustrates the importance of having a will. Without one, it doesn’t matter what you desire to happen with your assets. The laws of the state in which you reside will dictate the disposition of your assets. This is especially relevant in second-marriage situations. Marcelle’s stepfather may have wanted the property to pass on to her and her family, but without a will that said so, Massachusetts laws dictates it go to his distant relatives in Barbados. A sad outcome to be sure.

All it takes is a bit of planning to avoid disaster. If you don’t have an estate plan in place, hopefully what’s happening to Marcelle will motivate you to take action!

You can read the entire article here.

If your estate planning house isn’t in order, give me a call, I can help. While you won’t have to live with the oftentimes disastrous consequences of dying without an estate plan, your family will.

A Savior Is Born!

“And there were in the same country shepherds abiding in the field, keeping watch over their flock by night. And, lo, the angel of the Lord came upon them, and the glory of the Lord shone round about them: and they were sore afraid. And the angel said unto them, ‘Fear not: for, behold, I bring you good tidings of great joy, which shall be to all people. For unto you is born this day in the city of David a Saviour, which is Christ the Lord. And this shall be a sign unto you; Ye shall find the babe wrapped in swaddling clothes, lying in a manger.’ And suddenly there was with the angel a multitude of the heavenly host praising God, and saying, ‘Glory to God in the highest, and on earth peace, good will toward men.’“

Luke 2: 8-14.

Merry Christmas!

Retirement Savers Get a Boost – IRA Contribution Limits Increased for 2019.

There is good news for those of you who are actively saving for retirement. The IRA contribution limit, presently $5,500 for 2018, will increase to $6,000 for 2019. If you are age 50 or older in 2019, you can add an additional $1,000 to your IRA, for a total contribution of $7,000 for 2019. The increase applies to both traditional and Roth IRAs. This increase applies to contributions for the 2019 tax year, not for contributions made in 2019 for the 2018 tax year.  Non-working spouses may also benefit by making contributions to their own IRAs to boost retirement savings.

The increase is the result of cost-of-living adjustments made recently by the IRS to retirement account limits. This increase is the first since 2013!

Don’t forget, other IRA eligibility rules still apply. You must have earned income to contribute to an IRA. Generally, earned income is income from employment. Investment income and Social Security income is excluded. Furthermore, there are income limits that will affect your ability to make a fully deductible contribution to a traditional IRA. Your income may be too high to contribute to a Roth IRA. Finally, you cannot make a contribution to a traditional IRA in 2019 if you will be age 70½ or older.

For those of you participating in an employer sponsored 401(k) or 403(b) plan, the limit for salary deferrals into those types of plans will go up to $19,000 in 2019 ($25,000 if you are age 50 or older).

You can see all of the COLA increases for retirement accounts and other retirement related items HERE.

Having trouble putting together a retirement plan, or looking for ways to boost retirement savings?  Give me a call, I can help.

Saving for College Off the FAFSA Radar

Many of my clients have a desire to incorporate a college savings component into their financial plans to help with their grandchildren’s college education expenses. In many cases, a 529 college savings account has already been set up for the grandchild by the parents, and the client would like to contribute to that account. Simple yes, but there is a better way.

First, any person who wants to save for a college education should consider using a 529 college savings plan. “529″ is the section of the Internal Revenue Code that makes tax-favored college savings accounts possible. Under section 529, funds contributed to a 529 account grow on a tax-deferred basis, and may be withdrawn tax-free if the funds are used to pay for qualified education expenses in the year the expenses are incurred.  “Qualified education expenses” include tuition, fees, books, supplies, and equipment required for the enrollment or attendance of the account beneficiary at an eligible educational institution (most colleges and universities, public or private).  A section 529 account may be set up by anyone who desires to save money for college expenses, including a grandparent for a grandchild.

A grandparent who sets up a 529 account for a grandchild gets the tax-advantaged savings, but there’s another benefit for the grandchild: Funds in a 529 account established by a grandparent will not affect the grandchild’s eligibility for student loans, grants, work/study programs, and even scholarships.

The vast majority of college bound students must fill out the Free Application for Federal Student Aid (“FAFSA”). The FAFSA identifies those assets that will be taken into account to determine a student’s financial aid eligibility. Financial aid eligibility is typically determined from the student and parents’ income and assets disclosed on the FAFSA (including 529 accounts established by the parent or student). Money contributed by a grandparent to a 529 account in the student’s name or in the parent’s name will be counted against the grandchild on the FAFSA.  Thus, the grandchild is penalized for the grandparent’s generosity.

However, the student’s FAFSA does not consider the assets of a grandparent. So, a grandparent may establish a 529 account in their name for a grandchild and the account is not reported on the grandchild’s FAFSA. The grandparent is able to put money away for a grandchild’s college education, without penalizing the grandchild.   In addition, the grandparent still controls the funds in the account. If the grandchild decides to not go to college or she receives substantial scholarship awards, the grandparent may substitute out one grandchild for another as the account beneficiary.

Each state must set up its own section 529 program, and nearly all the states have done so. But you can establish a 529 account in any state, not just the state of your residence. These programs are state-specific, and they have differing contribution limits, investment options, and costs. Some states (including Michigan) offer income tax benefits for their residents who use the Michigan 529 plan. So it pays to research carefully before opening a 529 account.

Are you thinking about setting aside money for your child or grandchild’s college education? Give me a call, I can help.

Michigan Adopts E-Bike Law

Bicycling in Michigan has enjoyed a resurgence in popularity in recent years due in large part to the expansion of rail trails and other pathway systems, which allow cyclists to ride bikes off of roadways. Rail trails have become transportation corridors allowing cyclists to commute to work, exercise, or just sight see in a safe manner.

Electric bikes (e-bikes) are rising in popularity because they break down barriers preventing people from cycling. For a commuter, an e-bike allows the rider to get to and from work faster and with less effort. For a less experienced or weaker cyclist, an e-bike allows the rider to keep up with the rest of the ride group, or tackle longer distances or steeper inclines. And for many, an e-bike is the means to achieve physical fitness.  Today, e-bikes represent the fastest growing segment of the bicycle market. However, with the surging popularity of e-bikes, confusion arose whether an e-bike was truly a bicycle, and whether they could be legally ridden on trails and pathways closed to motorized vehicles.

Michigan became the 7th state to pass legislation specifically aimed at reducing the confusion faced by retailers, consumers, and law enforcement  as to what e-bikes are and where they can be used. Prior to the passages of these laws, e-bikes were technically classified as mopeds and could not be used on trails and pathways closed to motorized vehicles.

Under the new law most e-bikes are classified as bicycles, not mopeds.  The law creates a 3-tier e-bike classification system. Under this system, only Class-1 e-bikes, which are defined as pedal-assisted bikes (the rider must pedal) that can reach assisted speeds of up to 20 mph, may be ridden on any linear trail or other similar paved or groomed pathway unless prohibited by local authorities. Class-2 and Class-3 e-bikes, generally classified as bikes with electric motors that have the capability of self-propulsion (the rider doesn’t need to pedal), or which can reach a maximum pedal-assisted speed of 28 mph, are prohibited on linear trails and other similar paved or groomed pathways unless permitted by local authorities. The law gives discretion to local authorities to best manage e-bikes on local trails as they deem appropriate for access and safety. Class 2 and 3 e-bikes usage will mostly be limited to roadways (with or without bike lanes).

The law does not address the use of e-bikes on mountain bike trails, which is generally prohibited.

Other states that have passed similar legislation include California, Colorado, Illinois, and Utah.

The new law is Public Act 139 of 2017.

Three Things Your College Bound Child Needs to Leave Behind

Do you have a child getting ready to head off to college?  Whether your child goes away to school or commutes from home, don’t let them start the school year without leaving behind these three documents:

Medical Power of Attorney.  If your child is over the age of 18, you no longer have the right to speak to their physicians, or make medical decisions for them.  If your child has an accident or becomes seriously ill at school and is hospitalized, medical personnel will not discuss your child’s medical condition or treatment with you without authorization. Have your child sign a medical power of attorney. Commonly referred to as a “patient advocate designation,” your child can appoint you to speak with doctors and make medical treatment decisions for them in the event they cannot do so themselves.

HIPAA Authorization.  Have your child sign a separate HIPAA authorization.   A medical power of attorney will only help you and your child if your child is incapacitated AND in a hospital or similar facility.  There may be situations where your child is either not incapacitated or is not hospitalized, but you still need to speak to medical providers on your child’s behalf regarding treatment he or she is receiving.  A HIPAA authorization will enable you to talk to them or obtain medical records and other information regarding your child’s medical condition.  You may not be able to make treatment decisions for your child, but you can at least monitor their care.  Remember, even though you are the parent, medical providers will not speak or release information to you without your child’s prior consent, regardless of your child’s medical condition.

Durable Power of Attorney. Finally, have your child sign a durable power of attorney. Parents of college students have all heard the privacy speech from school administrators – “Due to federal privacy regulations, we cannot discuss anything regarding your student without prior written authorization” – and they mean it. In order for you to discuss a tuition or dorm bill, dispute a lab fee, or discuss any of your child’s financial or other affairs with any third party, you need written authorization. That’s where the durable power of attorney comes in to play.

Under a durable power of attorney, your child can appoint you as their agent to handle their personal and financial and other non-medical affairs, whether they are incapacitated or not. Everything from banking and bill paying to tuition or room and board issues can be handled by you as your child’s agent. If your child becomes ill or has an accident while at school, as your child’s agent you will be able to keep their affairs in order until they regain the ability to do so.

Make sure you and your child are prepared for the coming school year by making sure they leave behind a medical power of attorney, HIPAA authorization, and durable power of attorney.  Good luck!

Does your student need these documents?  Give me a call.  I can help.

Transferring Company Stock From a 401(k) to an IRA? Don’t Forget The NUA!

So, you are newly retired and thinking about what to do with your employer sponsored 401(k) account.  The stock market has gone up quite a bit recently and you’re pleased with the value of your 401(k) (or other employer sponsored account) – especially the value of the company stock in your account. You may be thinking about transferring your 401(k) to an IRA for greater investment flexibility. Before you do, you may want to consider a nifty strategy to potentially save a bundle on income taxes.

The strategy involves the net unrealized appreciation (NUA) on the company stock in your 401(k). In a nutshell, NUA is the difference between the current market value of the company stock and the price originally paid for the stock (cost basis). This NUA may be eligible for favorable capital gains tax treatment when the company stock is sold.

If you roll over your 401(k) account, including the company stock, to an IRA, and then later take distributions from the IRA, the entire distribution (including any company stock) will be subject to income tax at your ordinary income tax rate. That rate could be as high as 39.6% just for federal income taxes depending upon your tax situation.

If, instead of transferring your account balance (including the company stock) to an IRA, you take a lump-sum distribution of the entire account balance, including the company stock (sometimes called an “in-kind” distribution), the distribution of the stock will be subject to income taxes, but you will only pay long term capital gains taxes (from 0% to 20%) on the NUA when the stock is sold (you’ll pay taxes at ordinary tax rates on the cost basis portion). If you are able to complete a tax-free rollover of the remainder of the distribution (less the company stock) to an IRA, the amount rolled over escapes income taxation. The NUA strategy will not work if the stock is liquidated inside the 401(k), or rolled over to an IRA.

In order to make the strategy work, you must take an in-kind distribution of the company stock from your company retirement account as part of a lump-sum distribution of the entire account balance.  The lump sum distribution must follow a “triggering event,” such as retirement or other separation from service, attainment of age 59½, death [yes, the beneficiary of an inherited 401(k) or other employer plan account can take advantage of NUA], or disability.  The entire balance of the account must be distributed – you can’t just take an in-kind distribution of the company stock.

For those with appreciated company stock in their 401(k) or other employer-sponsored account, taking advantage of the NUA rules can help save on income taxes when the stock is sold. But like any other income tax saving strategy, especially involving retirement plan distributions, it’s complicated, and it may not work in every situation. So, before you go ahead and transfer your 401(k) account with the company stock to an IRA, sit down and consult with a qualified professional who can help you determine whether the NUA strategy is right for you.

Think the NUA strategy may work for you? Give me a call, I can help.

“Beware the Ides of March”

On this day, March 15, 44 BC, Gaius Julius Caesar was stabbed to death at the Roman Senate by conspirators led by Marcus Junius Brutus and Gaius Cassius.  Julius Caesar was a Roman general and politician who played a pivotal role in the events that led to the end of the Roman Republic and the beginning of the Roman Empire.

The Setting: A Public Place –

[Flourish. Enter CAESAR; ANTONY, for the course; CALPURNIA, PORTIA, DECIUS BRUTUS, CICERO, BRUTUS, CASSIUS, and CASCA; a great crowd following, among them a Soothsayer]

Caesar. Calpurnia!

Casca. Peace, ho! Caesar speaks.

Caesar. Calpurnia!

Calpurnia. Here, my lord.

Caesar. Stand you directly in Antonius’ way,
When he doth run his course. Antonius!

Antony. Caesar, my lord?

Caesar. Forget not, in your speed, Antonius,
To touch Calpurnia; for our elders say,
The barren, touched in this holy chase,
Shake off their sterile curse.

Antony. I shall remember:
When Caesar says ‘do this,’ it is perform’d.

Caesar. Set on; and leave no ceremony out.

[Flourish]

Soothsayer. Caesar!

Caesar. Ha! who calls?

Casca. Bid every noise be still: peace yet again!

Caesar. Who is it in the press that calls on me?
I hear a tongue, shriller than all the music,
Cry ‘Caesar!’ Speak; Caesar is turn’d to hear.

Soothsayer. Beware the ides of March.

Caesar. What man is that?

Brutus. A soothsayer bids you beware the ides of March.

Caesar. Set him before me; let me see his face.

Cassius. Fellow, come from the throng; look upon Caesar.

Caesar. What say’st thou to me now? speak once again.

Soothsayer. Beware the ides of March.

Caesar. He is a dreamer; let us leave him: pass.

Julius Caesar, Act 1, Scene 2.

 

A New Estate Planning Tool – The Michigan Asset Protection Trust

On February 5, 2017, Michigan became the 17th state (along with Delaware, Nevada, Ohio, and others) to permit residents to use asset protection trusts in their estate planning. Michigan’s new law, the Qualified Dispositions in Trust Act (the “Act”), allows an individual to create an irrevocable trust known as a domestic asset protection trust (DAPT) that, if set up correctly, will shield the trust’s assets from the claims of the individual’s creditors.

Until recently, asset protection trusts were available only in foreign (offshore) jurisdictions. The Bahamas, Bermuda, the Cook and Cayman Islands, Nevis, and several other jurisdictions developed highly favorable asset protection legal environments featuring sophisticated banking and trust services for clientele. Offshore asset protection statutes typically feature very short statutes of limitations periods for creditors to attack the trust, high burdens of proof for creditors, and require the creditor to challenge the trust in the jurisdiction of the trust’s location. However, with our federal government closely scrutinizing transfers of money away of the U.S., DAPTs are become more popular here in the states. In 1997, Alaska became the first state to enact a DAPT law for Alaska-based trusts.

Under the Act, a Michigan DAPT must be irrevocable, it must have a trustee located in Michigan, and, while the person who creates the trust (the “grantor”) may be a beneficiary of the trust, the grantor cannot have unrestricted access to the trust’s assets.

If a Michigan DAPT is set up correctly, a grantor’s creditors will be prohibited from reaching the trusts assets if the creditor brings a claim more than two years after the assets are placed into the trust. (A longer period applies to claims brought in bankruptcy.)  A Michigan DAPT cannot be created to defraud one’s existing creditors. Therefore, the trust must be created and funded before creditor claims arise.

The Michigan DAPT will be a useful planning tool for people with significant exposure to creditors, such as business owners and those engaged in high-risk professions, such as doctors and lawyers, where insurance may not offer adequate claim protection. A DAPT will not generally be suitable in a typical estate plan.

A Savior Is Born Unto You

“And there were in the same country shepherds abiding in the field, keeping watch over their flock by night. And, lo, the angel of the Lord came upon them, and the glory of the Lord shone round about them: and they were sore afraid. And the angel said unto them, ‘Fear not: for, behold, I bring you good tidings of great joy, which shall be to all people. For unto you is born this day in the city of David a Saviour, which is Christ the Lord. And this shall be a sign unto you; Ye shall find the babe wrapped in swaddling clothes, lying in a manger.’ And suddenly there was with the angel a multitude of the heavenly host praising God, and saying, ‘Glory to God in the highest, and on earth peace, good will toward men.’“

Luke 2: 8-14.

Merry Christmas!