Wash Away Debt in Bankruptcy and Keep Your IRA? Yes, You Can Do It.

Financial planning isn’t always about champagne dreams and caviar wishes. For many, it is simply about not drowning in debts after retirement.

I recently met with a client to discuss her options dealing with significant credit card debt. She is nearing retirement and did not know how she could make ends meet on a fixed income. She was hesitant to file bankruptcy because she was afraid she would lose her IRA to creditors if she did.

Like my client, many people avoid bankruptcy because they fear losing their IRA in the process. But it is almost always a bad idea to tap IRA money to pay debts. The IRS will assess a 10%penalty and income taxes on the withdrawn money if you are not yet age 59 ½. Also, you may find yourself running short of funds later in retirement when you will likely need the money.

Michigan and federal bankruptcy law offer IRA protection from creditors in bankruptcy. A bankruptcy filer in Michigan may use either state or federal exemptions to protect an IRA while getting rid of debts.

Under Michigan law, you may protect all traditional and Roth IRAs accounts in bankruptcy, including payments or distributions from those accounts or annuities. The Michigan exemption does not extend to money contributed to the IRA made within 120 days before filing bankruptcy. Second, the exemption does not protect IRAs from an order of a domestic relations court (spousal or child support). Finally, the exemption does not protect nondeductible contributions to an IRA or annuity contract.

The United States Bankruptcy Code protects traditional and Roth IRAs accounts to a combined limit of $1,362,800 (inflation adjusted). You can have any number of accounts of any type as long as the combined total of all such accounts does not exceed the exemption limit.

If the IRA consists of funds rolled over from an employer sponsored account, such as a 401(k) or 403(b), the dollar limit does not apply. The rollover funds will retain the unlimited protection under federal law.

The federal IRA exemption would work better for my client. Her IRA isn’t that large, and the federal exemptions for her other assets are more attractive than the Michigan exemptions.

You must consider many factors in making a decision to file bankruptcy. If you are at the point where you are considering an IRA withdrawal to pay down debts, bankruptcy may be the better option.

If you are struggling with debt and looking for a solution, give us a call, I can help you.

Frozen Pension Benefit – Do You Take the Lump Sum?

It’s a difficult question without an easy answer. For many, income security in retirement depends upon getting the answer right.

Employers have been fazing out pension programs for many years now, replacing them with 401(k) and similar employee-contribution type plans. Many of these fazed out pensions were frozen, leaving participant employees eligible to receive at least some benefit from the pension plan. For those who are entitled to a benefit from a frozen pension plan, many have the option to receive an up-front lump sum payment of their accrued pension benefit in lieu of a lifetime monthly annuity payment.

Faced with that option, do you take the money, or settle for the lifetime annuity? The knee-jerk reaction of many is to take the lump sum. I’ve seen lump sum offerings in the six-figures, a pretty significant chunk of change. But even then it’s not an easy question to answer, especially for those who have limited savings or other income resources beyond Social Security. Will that lump sum be enough to see you through for the rest of your life?

When you retire, a primary goal is to have sufficient income to cover living expenses for the rest of your life, regardless of how long you live, factoring in economic conditions such as inflation, and fluctuations in the financial markets. For married couples, that income must last for two lifetimes. To complicate things further, if you are like most people that I’ve work with, you will underestimate how long you will live in retirement. (Everyone faced with the lump sum payment question thinks they’re going to die in a car accident tomorrow so they want the money today.) But for a married couple in their middle sixties, it is reasonable to expect at least one spouse will live into their 90s. Living 3 decades in retirement is becoming commonplace.

If you elect the annuity, you (and even your spouse with certain elections) will get a check every month for the rest of your life, no matter how long you live. You bear no risk.

Suppose you decide to take the lump sum. You’ll receive a single payment from the pension plan regardless of how long you end up living. Now you have to invest that money to generate an income stream that will last the rest of your lifetime. How long will that be; and how confident are you the money will last that long? It depends upon many factors, but that risk is on you. And you don’t want to run out of money during retirement.

So what’s the answer – do you take the lump sum or settle for the annuity? Let’s look at some of the factors that can play into that decision:

If you (and your spouse if married) are in good health, and the security of a lifetime income stream is important to you, the annuity makes sense. If you are not comfortable handling your own investments, the annuity lets you leave investment decisions to the pension plan. If you are pessimistic about the economy, inflation, or other risk factors in the future, you can leave that risk with the pension plan choosing the annuity option.

The lump sum option may make sense if you (and your spouse if married) are older and in poor health. If you have sufficient savings and investments that the annuity would not be a needed source of lifetime income to make ends meet, then the lump sum may be the better choice. Also, if you are confident in your abilities to manage your investments to generate a good rate of return, and can prudently manage withdrawals from savings and investment over your retirement years, the lump sum may be appropriate.

In any event, if you are offered a lump sum payment as an option from a frozen pension plan, it is crucial to work with a competent advisor who can help you make a proper decision that meets your goals and objectives in light of your financial situation. Avoid an advisor who has a vested interest in your opting for the lump sum – like they want to manage and invest the money (for a fee).

If you are struggling with the lump sum vs. annuity question, give me a call, I can help.

Should Have Put A Ring On It.

Pellie was in a long term relationship with Tony that lasted over 40 years. They never married. Pellie became Tony’s caretaker when his health began to fail. Tony died in 2015. Pellie had received about $300,000 in assets from Tony up to and after his death. But Pellie believed she was entitled to much, much more. After Tony’s death, Pellie filed a claim against Tony’s trust for over $2,700,000 based upon Tony’s purported promises to take care of her. The trustee disallowed the claim. Pellie sued the trust in probate court, claiming that she and Tony had an agreement that he would take care of her after his death.

At the trial, the evidence showed that over the course of their relationship, Tony had often told here that he wanted her to take care of him and in return he would take care of her needs. Tony had verbally told Pellie that she would share in his estate. Tony’s estate plan did provide some stock and other assets to Pellie, including four bank accounts owned jointly with Pellie.

The county probate court dismissed Pellie’s lawsuit. The probate court reasoned that Tony’s promises were, in effect, a contract to make a will, and since it wasn’t in writing, the “agreement” wasn’t enforceable. Pellie appealed to the Michigan Court of Appeals, and the Court of Appeals affirmed the probate court decision.

Under Michigan law, a contract to make a will or devise, not to revoke a will or devise, or to die without a will (intestate) may only be established by either: a) provisions in a will stating the material terms of the contract; b) an express reference in a will to such a contract with extrinsic evidence proving the terms of the contract; or c) a writing signed by the deceased establishing the contract.

A party seeking to enforce such a contract must prove an actual express agreement and not merely a statement of intentions. Since Pellie could not produce a writing evidencing Tony’s agreement to provide her financial security after his death or to compensate her for caretaking services, she could not prevail.

It is pretty clear from the evidence that Tony made promises of care and support to Pellie. We don’t know why Tony didn’t adjust his estate plan to fulfill those promises; Nor do we know to whom Tony left the bulk of his assets.

Their’s was a 40 year relationship. However, without the benefit of marriage or a some type of written agreement, Pellie didn’t have a leg to stand on. Purely moral obligations are not enforceable. Had they been married, Pellie may have had claims to Tony’s assets.

When it comes to the distribution of a deceased person’s assets, oral promises or intentions aren’t worth the paper they’re written on. The moral of this story is that if you are in a relationship with another — without the benefit of marriage — you need to make sure to get any promises of financial support or security from your partner in writing.

The case is Norton-Cantrell v Anthony Bzura Trust Agreement.

You can read the Court of Appeals decision here.

Apps to Make Dementia Care Easier.

Smartphones and tablets have become integral parts of everyday life. There seems to be an app for everything. Not surprising, there are many smartphone and tablet apps to help dementia sufferers and their care givers address the many dementia-related challenges faced on a daily basis. Loretta Woodward Veney, a motivational speaker and author, whose mother has dementia, shares some of her favorite care giving and dementia apps available today and how they may help, at www.healthcentral.com.  There are apps to help schedule and organize appointments and care, apps to help share events, coordinate activities, and communicate with members of a care giving team, even activity apps to engage dementia sufferers.

You may follow the link here to read the article.

When The Elderly Refuse to Stop Driving: How One Family Took Action.

What do you do when the time comes for an elderly parent to stop driving, but they won’t?

When Stephen Petrow came face to face with dilemma, he and his siblings did something drastic – they anonymously reported their mother’s dangerously poor driving to the State of New York DMV. Although she passed the written exam, her license was revoked after she failed a mandatory driving test.  The examiner’s comments on her road test included:  “Extremely dangerous!! Turns wide into wrong side of road! Poor late braking. . . Completely unaware of surroundings.”

While Stephen Petrow knew this was the right thing to do, he wonders if he will have the courage to willingly give up his car keys (and autonomy) voluntarily if he becomes a danger to others.

This is a good article relating one family’s struggle with what is, unfortunately, a growing problem.

Read Stephen Petrow, When our elderly mother refused to stop driving, we took drastic action.

18 Questions You Should Be Asking A Nursing Home

How do you know whether a nursing home is right for a loved one?  The Pioneer Network, a non-profit organization, offers 18 questions to ask when evaluating a nursing home for a loved one (and a separate list of 16 questions to ask when evaluating an assisted living facility).  The Pioneer Network is made up of professionals working in long-term care, long-term care facility residents and family members who advocate for them.

The Pioneer Network, active in 36 states, is part of a growing broad-based movement in long-term care that is sometimes called “culture change.” Culture change is a movement away from generic, system-based care and toward more individual, person-centered/directed care. Under culture change, residents have a meaningful voice in the care they get and have as many of the freedoms they had in their earlier homes as possible.

You can find out if a nursing home is part of the culture change movement by asking specific questions (and the answers you should get) when you visit for a tour, including:

  • Is your nursing home involved in culture change?
  • Will my loved one be able to choose when they are awakened in the morning?
  • What is your policy regarding food choices and alternatives?
  • What types of activities are offered to residents?
  • What is the turnover rate for the direct care staff here?

Please go to this page at the Pioneer Network’s website to read the entire list of questions (with answers to listen for) to ask when assessing a nursing home or an assisted living facility for a loved one. The lists are available for download, too.

Short Term Care Insurance Becoming More Popular

According to an article at Financial Advisor online, more seniors are purchasing short-term care insurance policies to help with the costs of care. As the name implies, a short term care policy generally provides coverage for a maximum of 360 days, and can pay for assisted living, home care assistance and skilled nursing home care costs. Short-term care insurance helps seniors cover gaps in Medicare and can be an alternative to long-term care insurance when age, cost, or other factors are issues. The cost is substantially less than that of long-term care insurance. Over 90 percent of the purchasers of short-term care insurance are over the age of 60.

If you or a loved one are considering alternatives to paying for costs associated with care assistance or nursing home care, short-term care insurance may be an attractive option.  As with any insurance purchase decision, don’t invest unless you know how the policy works and fully understand its terms, including its exceptions and exclusions.

Please read the entire article here.

Do You Know These Social Security Rules for Retirees?

Social Security is the largest public benefits program in the United States, paying money to more than 59 million beneficiaries every year.  It’s also one of the most complicated.  So it helps to know how the system works. A good article at www.mysanantonio.com covers 5 rules about Social Security retirement benefits every retiree should know:

How to Qualify. You must have 40 retirement credits, which equals 10 years of employment, to qualify for retirement benefits. The years spent working do not have to be consecutive, but a failure to earn the 40 credits will keep you from collecting. Even if you were out of the workforce for a while, you may still qualify for benefits.

When to Claim. You may begin taking your retirement benefits between the ages of 62 and 70, but the age you may receive a full retirement benefit will vary between age 66 and 67 (full retirement age), depending on your birth date. Your monthly benefit will be less if you elect to begin taking it before your full retirement age.  Your monthly benefit will increase every year that you delay claiming beyond full retirement age.

Working During Retirement. Social Security will be the main source of income for many retirees, but it may not be enough to cover all of one’s monthly living expenses. For many retirees, working at least part-time in retirement is a necessity. If you take your benefits before full retirement age, but still work, you may face a reduction in your monthly benefit if you earn more than the applicable income limits. Once you reach full retirement age, you can earn as much as you like without a corresponding benefit reduction.

Benefit Maximum. The most a person can receive monthly in Social Security benefits this year is approximately $3,500, but only if the recipient qualified for the maximum benefit at full retirement age and then waited until age 70 to begin collecting.

Benefits Are Taxable. Depending upon your combined income from all sources, up to 85% of your Social Security benefits may be subject to income tax. And it doesn’t take a lot of income to get to that point.

If you are nearing retirement age and thinking about applying for your Social Security benefits, or are already receiving them, this article contains good information you need to know. Click this link to read the entire article.

Location, Location, Location (Part 2)

A little while back we looked at the 10 worst states for retirement living.  Now we’ll examine the 10 best states for retirement living.  The ranking, courtesy of Bankrate, considered several factors, including local weather, access to health care, cost of living, crime rate and tax burden. This year’s ranking also adds a broad standard-of-living measurement from the Gallup-Healthways Well-Being Index, a comprehensive survey gauging people’s satisfaction with their surroundings.

Surprisingly, popular retirement states like Arizona and Florida did not crack the top 10.  The following are Bankrate’s top 10 states for retirees to spend their golden years:

10. Virginia.  Virginia offers retirees relatively low taxes, low cost of living, low crime, and a moderate climate.

9. Iowa.  Iowa ranked well because of the availability of exceptional health care and a low cost of living.

8. Idaho.  Idaho landed near the top because of its low cost of living, low crime, and lots of sunshine.

7. Montana.  Montana finished in 7th place due to an abundance of sunshine, good health care, low taxes, and low crime.

6. Nebraska.  Nebraska offers residents a low cost of living, low crime, good health care, and plenty of sunshine.  (Good for the corn, too.)

5. Wyoming.  Wyoming made the top five due to the lowest taxes in the country, low crime, and abundant sunshine.

4. North Dakota.  North Dakota made the fourth spot due to its low cost of living, low crime, low taxes, good health care, and placing at the top of Gallup-Healthways’ Well-Being Index (a comprehensive measure of happiness).

3. Utah.  Utah ranked high in every measure, including the Well-Being Index.

2. Colorado.  Colorado took the proverbial silver medal with low cost of living, low crime, low taxes, and good health care.

1. South Dakota.  The top podium spot went to South Dakota (!), which did very well in almost every category, including good health care, extremely low taxes, low cost of living, and low crime.

You can read the entire article here.

Location, Location, Location – 10 Worst States for Retirement Living

Where does one spend their golden years?  A recent USA Today article identifies the 10 worst states for retirement living – at least according to a recent MoneyRates survey. The list was developed using data from 5 major categories, including: senior population; economic conditions [including taxes, cost of living, and unemployment (more seniors are working into their “retirement” years)]; crime; climate; and senior life expectancy. The 10 worst (and reasons why):

10. Alabama. Retirees face a shorter life expectancy and high crime rate.
9.   Michigan. Ranks below average in every category except senior population size.
8.   New York (tie). Low rate of property crime offset by poor climate and below average economic conditions.
8.   Maryland (tie). Offers retirees a high cost of living, high crime rate, and a small senior population.
8.   Georgia (tie). Good climate, but ranks below average in every other category.
5.   Nevada. 2nd worst violent crime rate in the country, plus a poor economy and shorter senior life expectancy.
4.   Illinois. Poor economic conditions and smaller than average senior population size.
3.   Tennessee. Ranks poorly because of high crime rate and shorter life expectancy.
2.   Louisiana. High crime rate, short senior life expectancy, and small senior population.
1.   Alaska. Brutal climate, high cost of living and a weak labor market. Ranks below average in every category.

Please read the entire article here.