Should I Establish A Power of Attorney?

There are three key estate documents that everyone should have: 

• Will

• Health Proxy

• Power of Attorney

If you have dependents, such as a spouse or children, the statement above graduates from “should have” to “need to have in place.”  The power of attorney document allows someone that you designate to act on your behalf if you are rendered incapacitated such as a car accident, illness, or as you become become more frail later in life.

What happens if I'm in a car accident?

If I have a wife and kids and one day I end up in a car accident and end up in a coma, without a power of attorney in place, not even my wife would be able to access accounts that are solely in my name such as bank accounts, retirement accounts, or creditors.   It could put my family in a very difficult situation if my wife is unable to access certain accounts to pay bills or withdraw money to pay for my medical bills while I am recovering.  If I establish a Power of Attorney with my wife listed as the POA (Power of Attorney), if I become incapacitated, she can use that document to access all of my accounts as if she were me.

Protecting Against Long Term Care Event

While this a valid example, the Power of Attorney document is more frequently used when elderly individuals experience a long term care event and they are no longer able to manage their finances.  The POA gives the designated person the power to make gifts, setup trusts, or implement other wealth preservation strategies to prevent the total depletion of your assets due to the expenses associated with the long term care event.

What happens if you don’t have a power of attorney?

From working with individuals that have been in these situations, it’s ugly.  Very ugly.  Instead of a trusted person being able to step in and act on your behalf, without a POA your family or friends would need to initiate a guardianship proceeding, wherein the individual is declared incapacitated and a guardian is appointed by the court to manage their financial affairs. The largest drawback of a guardianship proceeding is time and money.  It can often times cost more that $15,000 to complete a guardianship processing when taking into account court fees, attorney fees, court evaluations, and bonding fees.  In addition and arguably more importantly, you have no control over who the court will decide to appoint as your guardian and that individual will have full control over your finances.   You know your family and friends best.  Ask yourself this, wouldn’t you prefer to appoint the individual that you trust to carry out your wishes?  If the answer is “yes”, then you should strongly consider putting a power of attorney in place. 

About Michael……...

Hi, I’m Michael Ruger. I’m the managing partner of Greenbush Financial Group and the creator of the nationally recognized Money Smart Board blog . I created the blog because there are a lot of events in life that require important financial decisions. The goal is to help our readers avoid big financial missteps, discover financial solutions that they were not aware of, and to optimize their financial future.

Planning for Long Term Care

The number of conversations that we are having with our clients about planning for long term care is increasing exponentially.  Whether it’s planning for their parents, planning for themselves, or planning for a relative, our clients are largely initiating these conversations as a result of their own personal experiences.

The baby-boomer generation is the first generation that on a large scale is seeing the ugly aftermath of not having a plan in place to address a long term care event because they are now caring for their aging parents that are in their 80’s and 90’s.  Advances in healthcare have allowed us to live longer but the longer we live the more frail we become later in life.

Our clients typically present the following scenario to us: “I have been taking care of my parents for the past three years and we just had to move my dad into the nursing home.  What an awful process.  How can I make sure that my kids don’t have to go through that same awful experience when I’m my parents age?”

“Planning for long term care is not just about money…….it’s about having a plan”

If there are no plans, your kids or family members are now responsible for trying to figure out “what mom or dad would have wanted”.   Now tough decisions need to be made that can poison a relationship between siblings or family members.

Some individuals never create a plan because it involves tough personal decisions.  We have to face the reality that at some point in our lives we are going to get older and later in life we may reach a threshold that we may need help from someone else to care for ourselves or our spouse.  It’s a tough reality to  face but not facing this reality will most likely result in the worst possible outcome if it happens.

Ask yourself this question: “You worked hard all of your life to buy a house, accumulate assets in retirement accounts, etc. If there are assets left over upon your death, would you prefer that those assets go to your kids or to the nursing home?”  With some advance planning, you can make sure that your assets are preserved for your heirs.

The most common reason that causes individuals to avoid putting a plan in place is: “I have heard that long term care insurance is too expensive.”  I have good news.  First, there are other ways to plan for the cost of a long term care event besides using long term care insurance.  Second, there are ways to significantly reduce the cost of these policies if designed correctly.

The most common solution is to buy a long term care insurance policy.  The way these policies work is if you can no longer perform certain daily functions, the policy pays a set daily benefit.  Now a big mistake many people make is when they hear “long term care” they think “nursing home”.  In reality, about 80% of long term care is provided right in the home via home health aids and nurses.  Most LTC policies cover both types of care.   Buying a LTC policy is one of the most effective ways to address this risk but it’s not the only one.

Why does long term care insurance cost more than term life insurance or disability insurance? The answer, most insurance policies insure you against risks that have a low probability of happening but has a high financial impact.  Similar to a life insurance policy. There is a very low probability that a 25 year old will die before the age of 60.  However, the risk of long term care has a high probability of happening and a high financial impact.  According to a study conducted by the U.S Department of Human Health and Services, “more than 70% of Americans over the age of 65 will need long-term care services at some point in their lives”.  Meaning, there is a high probability that at some point that insurance policy is going to pay out and the dollars are large.  The average daily rate of a nursing home in upstate New York is around $325 per day ($118,625 per year). The cost of home health care ranges greatly but is probably around half that amount.

So what are some of the alternatives besides using long term care insurance?  The strategy here is to protect your assets from Medicaid.  If you have a long term care event you will be required to spend down all of your assets until you reach the Medicaid asset allowance threshold (approx. $13,000 in assets) before Medicaid will start picking up the tab for your care.  Often times we will advise clients to use trusts or gifting strategies to assist them in protecting their assets but this has to be done well in advance of the long term care event.  Medicaid has a 5 year look back period which looks at your full 5 year financial history which includes tax returns, bank statements, retirement accounts, etc, to determine if any assets were “given away” within the last 5 years that would need to come back on the table before Medicaid will begin picking up the cost of an individuals long term care costs.  A big myth is that Medicare covers the cost of long term care.  False, Medicare only covers 100 days following a hospitalization.  There are a lot of ins and outs associated with buildings a plan to address the risk of long term care outside of using insurance so it is strongly advised that individuals work with professionals that are well versed in this subject matter when drafting a plan.

An option that is rising in popularity is “semi self-insuring”.  Instead of buying a long term care policy that has a $325 per day benefit, an individual can obtain a policy that covers $200 per day.  This can dramatically reduce the cost of the LTC policy because it represents less financial risk to the insurance company.  You have essentially self insured for a portion of that future risk.  The policy will still payout $73,000 per year and the individual will be on the line for $45,625 out of pocket.  Versus not having a policy at all and the individual is out of pocket $118,000 in a single year to cover that $325 per day cost.

As you can see there are a number of different options when it come to planning for long term care.  It’s about understanding your options and determining which solution is right for your personal financial situation.

About Michael……...

Hi, I’m Michael Ruger. I’m the managing partner of Greenbush Financial Group and the creator of the nationally recognized Money Smart Board blog . I created the blog because there are a lot of events in life that require important financial decisions. The goal is to help our readers avoid big financial missteps, discover financial solutions that they were not aware of, and to optimize their financial future.

Do I Have To Pay Taxes On My Inheritance?

Whenever people come into large sums of money, such as inheritance, the first question is “how much will I be taxed on this money”?  Believe it or not, money you receive from an inheritance is likely not taxable income to you.

Of course there are some caveats to this.  If the inherited money is from an estate, there is a chance the money received was already taxed at the estate level.  The current federal estate exclusion is $5,430,000 (estate taxes and the exclusion amount varies for states). Therefore, if the estate was large enough, a portion of the inheritance may have been subject to estate tax which is 40% in most cases.  That being said, whether the money was or was not taxed at the estate level, you as an individual do not have to pay income taxes on the money.

Although the inheritance itself is not taxable, you may end up paying taxes if there is appreciation after the money is inherited.  The type of account and distribution will dictate how the income will be taxed.

Basis Of Inherited Property

Typically, the basis of inherited property is the fair market value of the property on the date of the decedent’s death or the fair market value of the property on the alternate valuation date if the estate uses the alternate valuation date for valuing assets.  An estate will choose to value assets on an alternate date subsequent to the date of death if certain assets, such as stocks, have depreciated since the date of death and the estate would pay less tax using the alternate date.

What the fair market value basis means is that if you inherit stock that was originally purchased for $500 and at the date of death has appreciated to $10,000, you will have a “step-up” basis of $10,000.  If you turn around and sell the stock for $11,000, you will have a $1,000 gain and if you sell the stock for $9,000, you will have a $1,000 loss.

Inheriting a personal residence also provides for a step-up in basis but the gain or loss may be treated differently.  If no one lives in the inherited home after the date of death, it will be treated similar to the stock example above.  If you move into the home after death, any subsequent sale at a loss will not be deductible as it will be treated as your personal asset but a gain would have to be recognized and possibly taxed.  If you rent the property subsequent to inheritance, it could be treated as a trade or business which would be treated differently for tax purposes.

Inheriting An IRA or Retirement Plan Account

Please read our article “Inherited IRA’s: How Do They Work” for a more detailed explanation of the three different types of distribution options.

When you inherit a retirement account, and you are not the spouse of the decedent, in most cases you will only have one option, fully distribute the account balance 10 years following the year of the decedents death.   The SECURE Act that was passed in December 2019 dramatically change the distribution options available to non-spouse beneficiaries. See the article below: 

If you are the spouse of the of the decedent, you are able to treat the retirement account as if it was yours and not be forced to take one of the options above.  You will have to pay taxes on distributions but you do not have to start withdrawing funds immediately unless there are required minimum distributions needed.

Note: If the inherited account was an after tax account (i.e. Roth), the inheritor must choose one of the options presented above but no tax will be paid on distributions. 

Non-Qualified Annuities

Non-qualified annuities are an exception to the step-up in basis rule.  The non-spousal inheritor of a non-qualified annuity will have to take either a lump sum or receive payments over a specified time period.  If the inheritor chooses a lump sum, the portion that represents the gain (lump sum balance minus decedent’s contributions) will be taxed as ordinary income.  If the inheritor chooses a series of payments, distributions will be treated as last in, first out.  Last in, first out means that the appreciation will be distributed first and fully taxable until there is only basis left.

If the spouse inherits the annuity, they most likely have the option to treat the annuity contract as if they were the original owner.

This article concentrated on inheritance at a federal level.  There is no inheritance tax at a federal level but some states do have an inheritance tax and therefore meeting with a professional is recommended.  New York currently does not have an inheritance tax. 

About Rob……...

Hi, I’m Rob Mangold. I’m the Chief Operating Officer at Greenbush Financial Group and a contributor to the Money Smart Board blog. We created the blog to provide strategies that will help our readers personally , professionally, and financially. Our blog is meant to be a resource. If there are questions that you need answered, pleas feel free to join in on the discussion or contact me directly.

What is the Process for Setting Up a Will?

What is the Process for Setting Up a Will?

Creating a will is often a task that everyone knows they should do but it gets put on the back burner. Creating a will is one of the most critical things you can do for your loved ones. Putting your wishes on paper helps your heirs avoid unnecessary hassles, and you gain the peace of mind knowing that a life's worth of possessions will end up in the right hands.  But before for you do, it helps to know the overall process of setting up a will to save you time and money.

What is a will?

A will is simply a legal document in which you, the testator, declare who will manage your estate after you die. Your estate can consist of big, expensive things such as a vacation home but also small items that might hold sentimental value such as photographs. The person named in the will to manage your estate is called the executor because he or she executes your stated wishes. Sometimes though, people get confused by this and aren't too sure what the meaning of an executor.

A will can also serve to declare who you wish to become the guardian for any minor children or dependents, and who you want to receive specific items that you own - Aunt Sally gets the silver, Cousin Billy the bone china, and so on. Someone designated to receive any of your property is called a "beneficiary."

Some types of property, including certain insurance policies and retirement accounts, generally aren't covered by wills. You should've listed beneficiaries when you took out the policies or opened the accounts. Check if you can't remember, and make sure you keep beneficiaries up to date, since what you have on file when you die should dictate who receives those assets.

What happens if I die without a will?

If you die without a valid will, you'll become what's called intestate. That usually means your estate will be settled based on the laws of your state that outline who inherits what. Probate is the legal process of transferring the property of a deceased person to the rightful heirs.

Since no executor was named, a judge appoints an administrator to serve in that capacity. An administrator also will be named if a will is deemed to be invalid. All wills must meet certain standards such as being witnessed to be legally valid. Again, requirements vary from state to state.

An administrator will most likely be a stranger to you and your family, and he or she will be bound by the letter of the probate laws of your state. As such, an administrator may make decisions that wouldn't necessarily agree with your wishes or those of your heirs.

Do I need an attorney to prepare my will?

No, you aren't required to hire a lawyer to prepare your will, though an experienced attorney can provide useful advice on estate-planning strategies such as establishing testamentary, revocable, and irrevocable trusts. But as long as your will meets the legal requirements of your state, it's valid whether a lawyer drafted it or you wrote it yourself on the back of a napkin.

Do-it-yourself will kits are widely available online which are of course better than nothing but we usually recommend that our clients at least have an attorney review their will and make sure the specifications in their will match their wishes.

Should my spouse and I have a joint will or separate wills?

Estate planners almost universally advise against joint wills, and some states don't even recognize them. Odds are you and your spouse won't die at the same time, and there's probably property that's not jointly held. That's why separate wills make better sense, even though your will and your spouse's will might end up looking remarkably similar.

In particular, separate wills allow for each spouse to address issues such as ex-spouses and children from previous relationships. Ditto for property that was obtained during a previous marriage. Be very clear about who gets what. Probate laws generally favor the current spouse.

Who should I name as my executor?

You can name your spouse, an adult child, or another trusted friend or relative as your executor. If your affairs are complicated, it might make more sense to name an attorney or someone with legal and financial expertise. You can also name joint executors, such as your spouse or partner and your attorney.

One of the most important things your will can do is empower your executor to pay your bills and deal with debt collectors. Make sure the wording of your will allows for this, and also gives your executor leeway to take care of any related issues that aren't specifically outlined in your will.

How do I leave specific items to specific heirs?

If you wish to leave certain personal property to certain heirs, indicate as much in your will. In addition, you can create a separate document called a letter of instruction that you should keep with your will.

A letter of instruction, which isn't legally binding in some states, can be written more informally than a will and can go into detail about which items go to whom. You can also include specifics about any number of things that will help your executor settle your estate including account numbers, passwords and even burial instructions.

Another option is to leave everything to one trusted person who knows your wishes for distributing your personal items. This, of course, is risky because you're relying on this person to honor your intentions without fail. Consider carefully.

Who has the right to contest my will?

Contesting a will refers to challenging the legal validity of all or part of the document. A beneficiary who feels slighted by the terms of a will might choose to contest it. Depending on which state you live in, so too might a spouse, ex-spouse or child who believes your stated wishes go against local probate laws.

A will can be contested for any number of other reasons: it wasn't properly witnessed; you weren't competent when you signed it; or it's the result of coercion or fraud. It's usually up to a probate judge to settle the dispute. The key to successfully contesting a will is finding legitimate legal fault with it. A clearly drafted and validly executed will is the best defense.

Michael Ruger

About Michael.........

Hi, I'm Michael Ruger. I'm the managing partner of Greenbush Financial Group and the creator of the nationally recognized Money Smart Board blog . I created the blog because there are a lot of events in life that require important financial decisions. The goal is to help our readers avoid big financial missteps, discover financial solutions that they were not aware of, and to optimize their financial future.