Kansas and Missouri Estate Planning

How do I Prepare for Income Taxes in Retirement?

Income taxes are applicable even without your day job.

You may elect not work in retirement.

You may simply enjoy families, hobbies, and volunteering.

Accordingly, you will not earn a paycheck.

According to a recent Market Watch article titled “How 401(k) savers can avoid a nasty surprise come retirement,” you will still owe income taxes.

This is no joke.

Keep reading.

If you have a traditional IRA or 401(k), you will owe taxes on withdrawals regardless whether they are part of your Required Minimum Distribution.

Does this mean you should not make contributions to your retirement plan while working?

Absolutely not.

You do received a tax benefit when the contributions are made.

The contributions are not "tax-free," however.

Rather taxes are deferred to the time you take withdrawals from the account.

When planning for retirement and calculating what you need, be sure you take the tax consequences into account.

For example, if you have $1 million in an account, you may only have $700,000 after taxes.

No one knows or can predict future tax rates.

As a baseline plan on 20 percent at the federal level and 3 to 10 percent at the state level.

To maximize the money in these accounts, be sure to delay withdrawals until after you turn 59½.

Why?

You will pay a penalty on any withdraw taken before this age.

What a waste.

If you plan to work and take withdrawals, this could put you in a higher tax bracket and require you pay more money in taxes or Medicare premiums.

If you plan to work in your 60s and 70s, delay withdrawals as long as possible.

If you can wait until you are 70½, you likely will maximize your retirement fund accumulations as this is the age when you must begin taking your Required Minimum Distributions.

A little strategy can go a long way in maximizing your savings and minimizing your tax liability.

Reference: Market Watch (June 3, 2019) “How 401(k) savers can avoid a nasty surprise come retirement”

What are the Tax Consequences of Inheriting a Home?

Taxes are a significant question when it comes to an inheritance.

Estate taxes and inheritance taxes are important topics of estate planning.

How one creates an estate plan will in turn affect the amount of taxes owed.

According to a recent nj.com article titled “I inherited my father’s home. Do I owe any kind of taxes?,” special care must be taken when it comes to passing along a home.

If a home is sold by the estate after the death of the surviving spouse, the heirs may divide the proceeds.

The estate tax exemption is $11.4 million, per spouse at present.

If the proceeds of the sale do not drive the value of the estate above this number, then federal estate taxes will not be triggered.

Depending on the state, a state estate tax or an inheritance may be not be an issue.

Kansas is one such state.

Missouri is another.

The money from the sale could trigger income taxes.

How are income taxes calculated?

The tax is determined from the difference between the sales price and the basis at assessment minus the cost of the sale.

What is basis?

The basis is found by adding the cost of improvements to the initial purchase price.

The asset basis receives either a “set-up” or a “step-down” according to the value on the date the decedent dies.

Keep the date of death value of the home.

This will be helpful should you be audited by the IRS in the future.

What would then be owed by the heirs?

The higher the difference, the greater the tax would be.

Generally, these are not large sums in most instances.

Reference: nj.com (March 11, 2019) “I inherited my father’s home. Do I owe any kind of taxes?”

Are There Any Dangers to Adding My Adult Child to My Accounts?

Naming an adult child on your account could be costly.

Are you a senior?

I understand what you are thinking.

You are wondering what would happen to your bank account if something were to happen to you, right?

Could you avoid probate simply by adding your adult child as a joint owner?

Yes.

You could.

According to a recent Kiplinger article titled “The Trouble with Joint Bank Accounts 'Just in Case',” this may not be the best decision.

What issues might you face?

If you want the account to pass in equal shares to all of your children, it will not.

Nope, the designation on the account will take precedent and transfer the account automatically to that joint owner child.

This could cause some family rancor, if that child does not share.

Another issue involves federal gift taxes.

You could be creating a gift tax issue if the account is larger than $15,000.

In fact, you could be creating an issue for your own taxes.

How?

Let us say your child is named on a $500,000 account.

This child then dies before you do.

Because your child is a joint owner of the account, it could be included in his or her taxable estate.

Yikes!

Because of you are a parent and not a spouse, you could be incurring an inheritance bill on your own money depending on where you live.

(Note: this "inheritance tax" concern is not a concern in Kansas or Missouri.)

Are their alternatives to naming a child as a joint owner of an account?

Yes.

One option most banks provide is a "Pay on Death" or a "Transfer on Death" account.

This allows for the account to pass to the beneficiary(ies) upon your death.

No tax is triggered if your beneficiary dies before you because he or she has no ownership until you die.

This beneficiary designation will allow the account to avoid distribution through probate.

What about retirement accounts? How do they work?

What if you need to access and use your retirement accounts but are incapacitated?

How will your loved ones have access to pay your bills and other expenses?

There can be only one owner of a retirement account.

This means naming a child as a joint owner is not an option.

Instead, you will need a financial durable power of attorney.

This allows you to designate him as an agent on the account to make financial decisions on your behalf.

This should be created by an experienced estate planning attorney.

You will also want to review the durable power of attorney with your bank or other entity before its use is required.

This will help things go smoothly should it become necessary.

Planning now will save you and your loved ones stress later.

Reference: Kiplinger (November 14, 2018) “The Trouble with Joint Bank Accounts 'Just in Case'”

What is "Qui Tam" and that Whistleblower Tax Case in New York?

Calling out unethical behavior is not often easy.

What would you do if you recognized unethical behavior in your boss?

Would you ignore it?

Would you speak out?

According to a recent The New York Law Journal article titled “Suit Is Filed in NY's First Unsealed Qui Tam Estate Tax Case,” Doreen Light chose to speak up.

What offense did she bring to light?

Tax evasion.

By whom?

Her former boss, Myram Melamed, who died in 2013.

She accused the former pathologist of misrepresenting his state of residence to avoid state income and estate taxes.

He apparently claimed to live in Florida, although he actually lived and worked full time in New York.

Adam Pollock of Ford O’Brien filed the complaint in Manhattan Supreme Court on behalf of Doreen Light.

This "qui tam" case was sealed until January 16, while it was under government investigation.

It was filed in 2014.

You may be asking, “what is a qui tam lawsuit?”

Good question.

Is it a whistleblower lawsuit brought under the False Claims Act (FCA).

Many FCA investigations involve Medicaid or Medicare fraud.

If the case is successful, the whistleblower is rewarded.

Translation = they are paid a reward.

Money.

What is a successful case?

That means the lawsuit culminates in fraudulent funds being recovered by the government.

How much does the Doreen Light lawsuit allege New York is owed in damages?

Nearly 2 million.

Quite a lot of money by any standard.

The New York State Attorney General Eric Schneiderman has not filed to intervene in this case.

Time will tell the final result.

Remember: “An ounce of prevention is worth a pound of cure.” When making your financial, tax and estate plans, do not go it alone. Be sure to engage competent professional counsel.

For more information about estate planning in Overland Park, KS (and throughout the rest of Kansas and Missouri), visit our estate planning website and be sure to subscribe to our complimentary estate planning e-newsletter while you are there.

Reference: New York Law Journal (January 19, 2018) “Suit Is Filed in NY's First Unsealed Qui Tam Estate Tax Case”

What Common Tax Mistakes Should Retirees Avoid?

Mistakes could make you pay more in taxes in retirement.

Retirement is a big change.

You will no longer be going to a job each day.

You will have more time to enjoy your hobbies and your passions.

You can spend more time visiting children and grandchildren.

That is all good.

Retirement also means you will need to change your tax strategy to keep more of your money.

Why?

You will still be taxed on income.

But the type of income you have will change.

According to a recent Kiplinger article titled “3 Tax-Planning Mistakes Retirees Too Often Make,” many people make common tax mistakes in retirement.

What are they?

Tax Loss Harvesting.

It is a common strategy.

You sell investments in your portfolio.

The investments increased in value.

As a result, you would be paying taxes on the gains.

If you utilize a "tax loss" strategy, you will sell a capital asset at a loss.

This would help offset the gain in your portfolio and would offset the tax on the gain.

It sounds great.

But it is not perfect.

Why?

Tax laws do not favor stock losses.

Yes, you can offset gains.

But if you have excess losses, you can only take $3,000 of your losses to offset other income for this year.

If the loss is greater, you could carry it forward to offset future years.

However, this would take time to fully make up for the loss in your portfolio.

RMDs that are too small.

Once you reach age 70 ^_1/2 you must begin taking "required minimum distributions" or face stiff penalties.

Taking minimum RMDs can work for many people, as it can help keep them in a lower tax bracket.

Still, there are estate planning benefits to taking larger distributions.

What are they?

By taking larger RMDs, you will be able to enjoy more of your own money.

And you might as well enjoy it yourself.

Why?

If a traditional IRA is passed along an heir, then the individual inheriting the IRA will be taxed accordingly.

What happens should the heir choose to take a complete lump sum distribution from the IRA?

Perhaps they want to engage in some high living and extravagant travel.

The money withdrawn will all be taxed as ordinary income.

This would put the heir in a higher (if not the highest) tax bracket for the year of this distribution.

Taxes on Social Security.

Many people think Social Security cannot be taxed.

Unfortunately, this is not true.

Up to 85 percent of your Social Security check could be taxed as income.

How much, if any, is taxed depends on your "provisional" income.

How do you calculate this?

Start with your adjusted gross income minus Social Security.

Add back any tax-free interest you received.

Finally, add 50 percent of your Social Security benefit.

The result is your provisional income.

How is this provisional income taxed?

If your provisional income total is less than $25,000 as a single or $32,000 as a married couple, your benefits will not be taxed on the federal level.

If the income falls between $25,000 and $34,000 as a single or $32,000 and $44,000 as a married couple filing jointly, up to half of your Social Security will be taxed.

Any income higher than these figures triggers taxation on up to 85 percent of your Social Security.

Yikes!

Teaching point?

You should review your income regularly to determine whether your additional income could affect your tax bracket.

When it comes to taxes and retirement, planning is key.

Working with an experienced financial planner can help you make the best decisions for your circumstances and goals.

Remember: “An ounce of prevention is worth a pound of cure.” When making your financial, tax and estate plans, do not go it alone. Be sure to engage competent professional counsel.

For more information about estate planning in Overland Park, KS (and throughout the rest of Kansas and Missouri), visit our estate planning website and be sure to subscribe to our complimentary estate planning e-newsletter while you are there.

Reference: Kiplinger (December 13, 2017) “3 Tax-Planning Mistakes Retirees Too Often Make”

How Can Taxes Change After My Spouse Dies?

Your taxes could increase as a widow or widower.

No one likes to think about his or her own death.

It can be even more uncomfortable to consider the death of a spouse.

Unfortunately, it is something you should consider.

According to a recent Kiplinger article titled “How Losing a Spouse Could Boost a Survivor's Taxes,” a lot will change when your spouse dies.

The bitterness of loss will be made worse because you will likely take a financial hit.

How?

First, you will lose income.

Instead of receiving two Social Security payments, you will receive just one.

Yes.

And it will be the larger of the two incomes, but it will still be a single income.

If you were not included in the pension benefits for your spouse, you may lose this as well.

In addition to loss of income, you will have an increased income tax.

Why?

You will be filing under single status rather than jointly.

More than half of your standard deductions would disappear.

As a result, you will have more taxable income.

With this greater income, you will be taxed at a higher rate.

Yikes!

Do you have money in tax-deffered accounts such as a traditional IRA, 401(k), or 403(b)?

If yes, then this money will be 100 percent taxable when you make withdrawals.

Are there any actions you can take to minimize this burden?

Yes.

If your spouse had a life insurance policy, you could use the payout to pay taxes on a rollover from a traditional IRA to a Roth IRA.

You should do this the year your spouse dies.

Why?

During this year, you can still file "jointly" as a married individual.

What good does rolling over to a traditional IRA make?

It will enable you to defer taxes on distributions after holding the Roth IRA account for five years.

Also, once you turn 70½, you will not have required minimum distributions.

This gives you more control over your taxable income.

The result?

Your tax bill will be reduced every year thereafter.

Remember: “An ounce of prevention is worth a pound of cure.” When making your financial, tax and estate plans, do not go it alone. Be sure to engage competent professional counsel.

For more information about estate planning in Overland Park, KS (and throughout the rest of Kansas and Missouri), visit our estate planning website and be sure to subscribe to our complimentary estate planning e-newsletter while you are there.

Reference: Kiplinger (October 13, 2017) “How Losing a Spouse Could Boost a Survivor's Taxes”

Where is Queen Elizabeth Investing Her Income?

The Queen has a few overseas investments.

When you think of the Royal family, you likely do not think of investing.

You may think of tragic events like the death of Princess Diana.

Or you may think of the fairy-tale loves of Prince William and Catherine, Duchess of Cambridge, or of Prince Harry and Meghan Markle.

But investing?

Again, not likely.

According to a recent CNN Money article titled “Queen's estate invested $13 million in offshore tax havens,” the Queen of England does have financial investments.

Why did this suddenly become news?

The BBC received leaks regarding these investments.

What information was leaked?

The income for the Queen is provided by the Duchy of Lancaster.

The Duchy of Lancaster has apparently invested more than $13.1 million into funds in Bermuda and the Cayman Islands.

One of these funds had connections to an irresponsible business in the UK.

Does this mean the Queen is in trouble?

Not necessarily.

There are no charges of wrongful behavior.

In fact, the Queen voluntarily pays income tax even though she is exempt by law.

The Duchy claims all of the actions taken were legal and legitimate.

In the grand scheme of the Queens financial holdings, this is a small amount.

The Duchy is valued at $680 million.

This is where the Queen receives income for official expenses.

Where are the majority of these investments?

Most are with agricultural, residential or commercial properties.

Did the Queen know where her money was being invested?

Although we cannot say for certain, she probably was unaware.

Many people—royal or not so—do not know where their money is being invested.

If you are not working with a financial advisor, then you would be prudent to make that one of the resolutions you make (and keep) for 2018.

Remember: “An ounce of prevention is worth a pound of cure.” When making your financial, tax and estate plans, do not go it alone. Be sure to engage competent professional counsel.

For more information about estate planning in Overland Park, KS (and throughout the rest of Kansas and Missouri), visit our estate planning website and be sure to subscribe to our complimentary estate planning e-newsletter while you are there.

Reference: CNN Money (November 6, 2017) “Queen's estate invested $13 million in offshore tax havens”

How Can I Optimize Monetary Gifts to My Family?

Not planning your giving can have unintended consequences.

Gift giving can be a useful estate planning tool.

But it must be done right.

According to a recent nj.com article titled “Gift tax consequences for you and your heirs,” you could end up owing taxes if you do not give wisely.

There are some gifts that are exempt from taxes.

There are also some gifts that are exempt under specific circumstances.

What gifts are generally nontaxable?

• Gifts for tuition*
• Gifts for medical expenses*
• Gifts to your spouse
• Gifts to a political organization
• Gifts to qualifying charities

Keeping your gifts to under the estate and gift tax exemption is important.

What is the exemption limit?

The estate and gift tax exemption is $5.49 million per taxpayer.

That is the total amount of "taxable gifts" you may make during your lifetime, but doing so means you have correspondingly reduced the amount you may exempt from estate taxes when you die.

In short, you can use it all of the overall exemption during your lifetime, at your death, or some now and the balance later.

Next year, the amount will be $5.6 million.

Your federal income tax is not impacted by giving gifts to family or leaving assets to your heirs.

On the other hand, charitable contributions can provide income tax deductions.

When giving gifts to your family, you can give $14,000 per person each year without it counting towards your lifetime gift exemption.

This amount will increase to $15,000 starting next year.

For gifts below this amount, you need not file a gift tax return.

Work with an experienced estate planning attorney so your gift planning is carefully coordinated with your overall goals.

*To qualify as excluded gifts, these gifts must be paid directly to the relevant institution for benefit of the donee and not directly to the donee.

Remember: “An ounce of prevention is worth a pound of cure.” When making your financial, tax and estate plans, do not go it alone. Be sure to engage competent professional counsel.

For more information about estate planning in Overland Park, KS (and throughout the rest of Kansas and Missouri), visit our estate planning website and be sure to subscribe to our complimentary estate planning e-newsletter while you are there.

Reference: nj.com (October 5, 2017) “Gift tax consequences for you and your heirs”

How Could a Roth IRA Help with Estate Planning?

Roth IRAs are tax effective for beneficiaries.

Retirement planning and estate planning do not need to be separated.

In fact, planning ahead involves a holistic view of your finances and your goals.

According to a recent Motley Fool article titled “A Clever Way to Cut Your Heirs' Income Taxes,” a Roth IRA can be useful for both.

How so?

Money put into a Roth retirement account has already been taxed.

This means you do not owe federal income taxes when the money is withdrawn.

There is a caveat, however.

The account must have created at least five years before your death.

What if there is still money in the account when you die?

The account will be transferred to your named beneficiary on the account.

The IRS does have rules regarding inherited IRAs.

What are they?

The beneficiary is required to take distributions based on his or her predicted live expectancy.

The IRS has a table specifically for this purpose.

Your beneficiary does not need to remove all of the money at once.

If they do leave money in the account, it will continue to grow tax-free.

This will provide them with some valuable tax-free income in the future.

What if you are already retired?

Is it too late for a Roth IRA?

No.

You can convert a regular IRA to a Roth IRA at any age.

Work with an experienced financial advisor and your CPA to help run the numbers on this conversion to see if it is appropriate for your unique circumstances.

Remember: “An ounce of prevention is worth a pound of cure.” When making your financial, tax and estate plans, do not go it alone. Be sure to engage competent professional counsel.

For more information about estate planning in Overland Park, KS (and throughout the rest of Kansas and Missouri), visit our estate planning website and be sure to subscribe to our complimentary estate planning e-newsletter while you are there.

Reference: Motley Fool (September 14, 2017) “A Clever Way to Cut Your Heirs' Income Taxes”

What Taxes are Owed when Someone Dies?

Any time an estate is distributed, there is a chance taxes may be due.

Taxes.

No one likes them.

But they are a fact of life.

According to a recent Financial Buzz article titled “Inheritance Taxes May Await You,” they can also be a fact of death.

What taxes could be owed?

Estate Taxes.

An estate tax is paid from the estate to the federal or state government.

If you are single, you will have an exemption of $5.49 million for the federal estate tax (that is going up to $5.6 million on January 1, 2018).

If your estate is worth less than this, there will be no tax owed.

If you are single, the number doubles accordingly with an exemption of $10.98 million (that is going up to $11.2 million on January 1, 2018).

What if your estate is worth more?

Your estate in excess of the amount exempted with be taxed at 40 percent.

Some states also have an estate tax with their own specific threshold rules.

Inheritance Tax.

An inheritance tax is paid by the beneficiary rather than the estate.

There is no federal inheritance tax.

Some states have an inheritance tax, including Kentucky, Maryland, Nebraska, New Jersey, and Pennsylvania.

Not all states will have the same rules.

Some exempt spouses and children from this tax.

Some states will have both inheritance and estate taxes.

This means your assets could be taxed rather heavily at your death.

Capital Gains Tax and Income Tax.

The federal government does not consider an inheritance to be income.

Still, depending on what you inherit, you may have taxable income.

A capital gains tax will require payment on any profit.

Estate planning involves many rules and regulations.

Work with an experienced estate planning attorney to meet your goals.

So, how do you find an "experienced" estate planning attorney?

First, ask around. Friends, family and other professional advisors are trustworthy sources.

Second, conduct an "organic" search on "Google" for "estate planning" near you (e.g., "Estate Planning Anytown MoKan").

Third, either way, verify! Check out the education, experience, ratings and client reviews of any attorney before you contact him or her.

How?

Two helpful online resources are just a mouse click away to assist with your due diligence:  Avvo.com and Lawyers.com.

Check any Avvo ratings, client ratings/testimonials and attorney endorsements on Avvo.com and any "peer ratings" by judges/other attorneys and any client ratings/testimonials on Lawyers.com.

In fact, I use both of these services to thoroughly vett attorneys before referring members of our "client" family for legal help in other areas of law or for matters in jurisdictions outside Kansas or Missouri.

Remember: “An ounce of prevention is worth a pound of cure.” When making your financial, tax and estate plans, do not go it alone. Be sure to engage competent professional counsel.

For more information about estate planning in Overland Park, KS (and throughout the rest of Kansas and Missouri), visit our estate planning website and be sure to subscribe to our complimentary estate planning e-newsletter while you are there.

Reference: Financial Buzz (September 12, 2017) “Inheritance Taxes May Await You”