Illinois Estate Planning and Elder Law Blog

You can withdraw your original contributions to a Roth at any time. But you must wait five years to avoid paying the tax on earnings on regular contributions and you must be 59 1/2 years old.

If you inherit a Roth from your spouse, the taxable period ends either five years after the account was opened by your spouse or five years after the surviving spouse opened his own Roth, whichever is earlier.

A surviving suppose can name his children as equal beneficiaries of the same Roth. It is in the children’s interest to do so. Any heir other than a spouse who treats the Roth account as his own must take the required distributions from the Roth beginning by December 31st of the year after the year of the previous owner’s death. If the children keep the account intact and they want to stretch the withdrawals as long as possible, they are restricted to using the oldest child’s age. However, if they split the account, each sibling can stretch the distributions across his own lifetime. This means younger siblings can spread withdrawals over more years, leaving more assets in the account for a longer time and most likely realizing more tax-free earnings.

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The components of Medicare are:

1) Part A, mainly hospital coverage;
2) Part B, outpatient coverage; and
3) Part D, drug coverage.

Medigap coverage pays the uncovered portions of most Medicare bills.

There is also Medicare Advantage coverage which provides most of the coverages in items 1), 2), 3) and Medigap coverage combined in one package. When creating your estate plan, medical bills and their coverage by insurance need to be addressed.

Medigap coverage is important because Medicare is not enough coverage for people with average to above-average medical costs.
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Anne Kates Smith discusses in her article in Kiplinger’s magazine a law enacted at the end of last year which authorizes tax-advantaged savings accounts for individuals with disabilities knows as ABLE (Achieving Better Life Experience) accounts.

Anyone can open an ABLE account for an eligible beneficiary. This is someone who has a disability that was present before age 26 and that is “marked and severe” functional limitations. Individuals who have met the disability standards for Supplemental Security Income (SSI) will qualify as will those with conditions such as autism, Down syndrome or blindness.

A beneficiary can have only one ABLE account.

Contributions to the account are after-tax, and earnings and distributions from the account will not count as taxable income. Annual contributions must be under the federal gift-tax exemption ($14,000 in 2015), and the total account cannot exceed state-based limits for 529 accounts.

The expenses covered include educational expenses, assistive technology, transportation costs, specialized housing and job training.

Account assets generally will not affect eligibility for other programs with the exception of SSI which may be impacted if account assets exceed $100,000.
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In the November 2015 issue of Kipplinger’s magazine, an article points out that it is common for families to distribute assets through the use of trusts, which come in more flavors than Jelly Belly jelly beans.

Trusts can minimize estate taxes, protect assets from mistakes of heirs or avoid probate keeping information private.

A revocable living trust allows the creator to maintain control over the assets while he is alive. This type of trust avoids probate, and if a husband and wife put revocable living trusts in place, they can include credit shelter provisions which allow each of them to use his/her Federal Estate Tax Exemption ($5.43 million in 2015) thereby passing over $10 million free of Federal Estate Tax.

Asset protection trusts can be used if there are concerns about the spending habits of beneficiaries. This type of trust protects beneficiaries from creditors, bankruptcy and future ex-spouses because assets belong to the trust, not the beneficiary.

A personal message by the trust creator included in the trust often makes an otherwise impersonal document far less sterile. A story behind family heirlooms can be included, or the trust creator can express why he values education or entrepreneurship.
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A Home Equity Line of Credit allows you to get cash from the equity you have in your home. Most lenders look for a cushion of 30% equity already in the home before they will consider allowing the homeowner to borrow against the home’s equity. With house values only beginning to rebound, some homeowners can’t meet this 30% requirement. Other homeowners find they have little in excess of this 30% requirement available to borrow against.

The rates offered by lenders for Home Equity Lines of Credit are close to those offered to home buyers.

Home equity is a consideration for estate planning. It is a major asset and in many cases the largest asset in an estate. Careful consideration needs to be given before a decision is made which will affect home equity in the short term and the long term.
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Estate planning involving inherited Individual Retirement Accounts (IRAs) can be tricky. Inherited IRAs are different from other IRAs. Only an IRA inherited from a spouse can be rolled into your own IRA. Also, IRAs inherited from different people can not be consolidated into one account.

If you take assets from an inherited IRA and deposited them in your own IRA, all of those inherited IRA assets will be taxable. In addition, you will have to remove any assets you deposited from the inherited IRA which are above your allowed IRA contribution for the year ($5500 if you are under age 50 or $6500 if you are 50 or older) or you will incur further penalties.

It is important to get the titling correct not only on your statements from the IRA custodian, but also on the records your IRA custodian provides to the IRS.

The advantage to retitling the inherited IRA is that you can extend withdrawals from the IRA the length of your lifetime instead of having to withdraw the assets sooner. With an inherited IRA you must make withdrawals every year by December 31th beginning the year after the original owner’s death.

If you are not happy with the original custodian or investment, you can use a trustee-to-trustee transfer to move the IRA account to another financial institution provided the current IRA custodian allows it.
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Health Savings Accounts are available for individuals who have high-deductible health plans. In 2015, a plan for an unmarried person is considered high deductible if it has an annual deductible of at least $1,300 and the annual out-of-pocket expenses (deductibles, co-payments and other expenses) that the insured must pay for covered benefits cannot exceed $6,450.

The unmarried person can contribute up to $3350 each year and an additional $1000 if he is over age 55.

For Family plans, the minimum deductible is $2600, annual out-of-pocket expenses $12,900 and contribution limit $6650 with an additional $1000 if contributor is over age 55.

Unlike Flexible Savings Accounts, Health Savings Account holders can carry over balances from year to year until the account holder’s death, and if planned properly, until the account holder’s spouse’s death.

All contributions to, distributions from and income earned in the account are free from federal income tax as long as the assets are used to pay for qualified medical expenses. Depending on the amount contributed and distributed from the account and how long the account has been established, Health Savings Account balances have the potential to be substantial.
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Roth IRAs (Individual Retirement Accounts) allow for tax free withdrawals of both contributions and earnings.

The person who opens a Roth and makes periodic contributions can withdraw those original contributions at anytime without penalty and with no tax owed. The rules are spelled out in IRS Publication 590, “Individual Retirement Arrangements”.

As for earnings, a Roth contributor must wait five years (calculated by the IRS as beginning January 1st of the year for which the first Roth contribution was made) before earnings can be withdrawn tax free. And the Roth contributor must be 59 1/2 years old to avoid the 10% penalty for early withdrawal on the earnings and avoid income tax on the earnings.

The Roth contributor who converts to a Roth (as opposed to opening a Roth as in the preceding paragraph) must hold the assets in the Roth for five years or until he turns 59 1/2, whichever comes first, to make penalty-free withdrawals of the converted amount. The earnings on that converted Roth are treated differently. The converter must hold the Roth for five years to withdraw any earnings tax free. The age 59 1/2 category does not come into play. Fortunately, the withdrawal rules for Roth IRAs provide that any distributions come first from contributions, then from conversions, then from earnings so there is no need to keep separate the conversion amounts from the earnings.
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In his recent article in the Wall Street Journal titled: Brokerage Accounts: What to Do When You Inherit One, Matthias Rieker outlines the best way for individuals who receive a brokerage account from a deceased relative or friend to access the account.

Because brokerage firms must follow specific legal guidelines regarding who can get access to accounts, the responses by the firms are often slow. Some steps to consider which could help avoid delays are as follows:

• Investors should keep information about their beneficiaries current so they are the same as listed in their wills. Information filed with the brokerage firm prevails over designations in a will.

• Investors should consider the benefits of putting a brokerage account in a revocable living trust. Trustees can immediately access brokerage accounts titled in the trust after the grantor’s death, and the Probate process with the courts is avoided.

• Beneficiaries or executors should get the Federal Tax Identification Number for the estate as the decedent’s Social Security number is invalid after death and brokerage firms will not distribute without an identification number to assign to the account.
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When children are young and parents have fewer assets, choosing a guardian for your children means finding a family where your values are shared and located where you want your children to live.

With older children, consideration of their wishes comes into play when choosing a guardian. Choices about where they want to live and personality conflicts are taken into account.

There are also the financial aspects of the guardian’s role which often include a trust for the benefit of the children. With a testamentary trust, parents can stipulate an age when each child can have control over his trust assets. Age 25 or 30 is typical. It is also common to see a staggered distribution of assets such as one-third at ages 25, 30 and 35 and including trustee authority to spend assets for the benefit of the children, such as on college, prior to these distributions at ages 25, 30 and 35.
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