Lambros Law Office LLC

How to Infuriate Your Second Wife: Neglect Updating Your Beneficiaries

What would happen if you did not update your beneficiary designations every few years? How about your second spouse having no recourse, when a life insurance policy payment is made—to your ex? Remember that beneficiary designations have precedence over last wills and testaments in court.

CNBC’s recent article, “Out-of-date beneficiary designations are a common and costly mistake,” says that naming beneficiaries can come with unexpected costs, like deeding money to an irresponsible minor. Many people still have ex-spouses or deceased relatives named as a beneficiary on a retirement account or on a life insurance policy purchased long ago.

That is why it is critical to review these after marriages, divorces, births, adoptions, deaths, and other major life events.

Beneficiaries for some retirement accounts can be easily reviewed and changed online. For others, the account holder just has to ask for the right form from the administrator.

If you don’t have any named beneficiaries—either because you never named them or your beneficiaries pre-deceased you—your assets may pass to your estate or be forced to go through probate. This can create expenses and headaches.

If your IRA winds up going to your estate, instead of to a named beneficiary, the estate can be forced to withdraw funds and pay the tax on those withdrawals in a short time.

In addition to traditional, Roth, SIMPLE and SEP IRAs, beneficiaries should be checked on 401(k) plans, 403(b), and deferred-compensation employer plans, life insurance policies, 529 education savings accounts, and any bank or other investment account that’s designated as "Transfer on Death."

Naming a minor child or other person incapable of managing funds, is another possible mistake.

Even a mistake by an administrator, such as when systems are updated, would not be a reason for the designation to be dismissed by a court.

It sounds basic, and yes, a little boring, but it’s very necessary: review all of your assets that have beneficiary designations and do the work to make sure they are all up to date.

Reference: CNBC (April 17, 2018) “Out-of-date beneficiary designations are a common and costly mistake”

∗ For more information about this and other similar topics, please visit: www.LambrosLawLLC.com or call us at: (401) 383-9899 .

Strategies for 529 and ABLE Plans Need Review Under New Tax Law

With the passage of the 2017 Tax Act, up to $10,000 from Section 529 plan funds may now be used for elementary or secondary school expenses. That’s a big change for parents with children in private schools.

As noted in Think Advisor’s recent article, “Investing in 529, ABLE Plans? Better Check Tax Law Changes,” the new law will permit Section 529 plan funds to be rolled over into an ABLE account for the designated beneficiary or the designated beneficiary’s family member, in an amount up to the annual 529 plan contribution limit. (These rollovers would offset other contributions made to the ABLE account for the year.) Any amounts rolled over in excess of the limitation are included in the distributee’s gross income when they’re distributed. These rules are effective for rollovers that happen after December 31, 2017 and before January 1, 2026.

The new rules for elementary and secondary school expenses could mean that some people may want to open a second Section 529 plan for K-12 school expenses. However, the $10,000 amount applies on a per-student basis and not a per-Section 529 account basis. Therefore, if the student is a beneficiary of several accounts, he or she can only receive a maximum of $10,000 from all the accounts. Anything over the $10,000 will be taxable.

ABLE accounts also underwent some significant changes with the 2017 Tax Act. The new law expanded ABLE account contribution rules, so that the account beneficiary can now contribute his or her earned income, even if the contribution (when added to other contributions) results in the contribution levels going over the annual contribution limit (which is tied to the annual gift tax exclusion amount: $15,000 for 2018).

Bear in mind that while the account beneficiary’s contribution is limited to either her income or the federal single-person poverty limit—whichever is lowest—this additional contribution is not available to account beneficiaries who contribute to 401(k), 403(b) or 457(b) plans. ABLE account beneficiaries who contribute to their account are eligible for the saver’s credit. This applies for tax years beginning after December 31, 2017 and before January 1, 2026.

Together, these changes may present entirely new opportunities for planning at all levels of education, particularly for those who are supporting a disabled child.

Reference: Think Advisor (April 17, 2018) “Investing in 529, ABLE Plans? Better Check Tax Law Changes”

∗ For more information about this and other similar topics, please visit: www.LambrosLawLLC.com or call us at: (401) 383-9899 .

What Lucas and Sophia Need More than Another Toy

It’s a request that many millennial parents are making: “We’re overrun with toys. What about a starting a 529 college savings plan for your grandchildren?” It’s not as much fun as a big toy fire truck, but a fund that you contribute to over the years will really help when the little darling is ready to go to college. These plans are widely available, simple, secure and many have online features that let account owners invite others in the family to make a gift.

KTVZ.com’s recent article, “Meaningful gift for a child: To their college savings fund,” says the Oregon College Savings Plan also offers downloadable gift certificates for birthdays, holidays, and non-holidays for those interested in making a gift contribution to a child’s account.

Supporting a child’s future education can be a win-win for everyone.

The Oregon College Savings Plan is a state-sponsored, tax-advantaged 529 savings plan that offers a variety of low-cost investment portfolios to choose from, including age-based, multi-fund, single-fund, and guaranteed options.

Anyone with a Social Security or Federal Tax ID number can start an account or contribute to an Oregon College Savings Plan account. A 529 account can be started with as little as $25, and any earnings grow free from federal tax.

These 529 College Savings Plans also offer certain gift and estate tax planning benefits, so ask your estate planning attorney about this. In some instances, the contributor can receive state tax benefits to incorporate the gift into his or her overall estate and legacy planning.

Contributions to a 529 College Savings Plan account may be eligible for a state income tax deduction for taxpayers. In Oregon, the deduction is up to $4,660 for taxpayers filing jointly or $2,330 for single filers for tax year 2017, with some limitations.

When used for qualified higher education expenses, the withdrawals are tax-free for state and federal taxes. You can use the 529 funds for tuition, room and board, books, supplies, computers, certain required fees and some other related technology costs. The funds can be used at most accredited colleges in the US and at some colleges overseas.

Reference: KTVZ.com (December 7, 2017) “Meaningful gift for a child: To their college savings fund”

∗ For more information about this and other similar topics, please visit: www.LambrosLawLLC.com or call us at: (401) 383-9899 .

Medical Tax Deduction on the Chopping Block in GOP Tax Bill

The medical tax deduction is under fire, included in the tax reform bill presented by House Republicans. This would have devastating economic consequences for seniors, people suffering from chronic conditions and the disabled, who have been able to get a tax deduction for qualifying medical and dental expenses, when they exceed 10% of the household’s adjusted gross income.

Time’s recent article, “An Important Tax Deduction for Seniors and Their Families Is on the Chopping Block,” notes that about 6% of tax filers take advantage of this deduction. They include people with expensive care needs, like seniors in nursing homes, people with chronic medical conditions and parents of disabled children.

Those who support the bill believe it would put more money into middle-class pockets because of a proposed increase in the standard deduction for individuals and married couples, rising to $12,000 and $24,000, respectively. However, that increase won’t offset the loss of the medical expense deduction for those who claim it.

Here’s an example of how the deduction works: a single senior with $40,000 AGI has medical expenses of $6,000 annually. That’s more than 10% of her income, so $2,000, wouldn’t be subject to tax. If her taxable income places her in the 15% bracket, she’d lose out on $300 of federal income tax savings.

In addition, people who use the deduction to pay for long-term care costs may forfeit much more. For example, a woman in her mid-80s who pays, on her own, the $11,000 monthly cost of her assisted living facility can afford to do this by selling highly appreciated stock and using the medical expense tax deduction to eliminate any taxes she’d otherwise owe. An increase in the standard deduction wouldn’t help her because it wouldn’t be as much as her savings under the medical expense deduction.   She would also have a higher tax burden along with her substantial care costs. If the medical deduction went away, this lady would go through her money quickly and possibly need Medicaid. Medicaid pays the long-term care costs of people who have exhausted their income and meet other criteria.

Many opponents believe that the biggest cost from eliminating the medical expense deduction is going to be a dramatically expanded reliance on Medicaid, which might create an even bigger problem for an already strained resource.

Reference: Time (November 3, 2017) “An Important Tax Deduction for Seniors and Their Families Is on the Chopping Block”

∗ For more information about this and other similar topics, please visit: www.LambrosLawLLC.com or call us at: (401) 383-9899 .

Great Grades and Great Planning Equally Needed for a College Education

Here’s a scary number: the cost of a college education is growing faster than inflation. Tuition increased by approximately 9% from 2012 to 2017. Figuring out how to pay for college requires advance planning and becoming extremely knowledgeable about loans, grants, scholarships and other available kinds of assistance.

Higher education costs are out-pacing inflation by an average of 4%. From 2012 to 2017, tuition has risen by about 9% across the board. With these escalating expenses, some families are having a tough time deciding the best way to pay for college.

The Michigan State University Extension recently posted an article, “Planning and paying for higher education,” that says applying for financial aid is usually the first step people will take to help with the expense.

There are four basic types of aid that can be received:

• work study;
• grants;
• loans (federal and private); and

Aid is requested by completing the Free Application for Federal Student Aid (FAFSA form). This is filed between October and February prior to the student’s fall and spring classes to see what financial aid he or she is eligible to receive based on need. Student resources, parent’s resources (if the student is considered a dependent) and academic status (full-time, part-time) are factored into the equation.

Once the FAFSA form is filled out, the Expected Family Contribution (EFC) is created. The EFC isn’t the amount of money the family will have to pay for college and it’s not the amount of federal student aid the student will receive. It’s a number used by the school to calculate the amount of federal student aid the student is eligible to receive. The school sends financial aid award letters in the spring, which will help in calculating what will be required to defray the cost of school for a year.

When a student and parent have time, they should look into available college saving tools, such as 529 educational savings plans. Withdrawals from these plans aren’t taxable, the earnings are tax deferred, the contributions are considered gifts and the funds can be transferred between siblings without an effect on American Opportunity, HOPE, and Lifetime Learning Education Tax Credits. A Coverdell Educational Savings Account is another option to assist with college expenses. It’s similar to a Roth IRA, but can only be used for education.

If you are lucky enough to have relatives who are willing and able to help with the cost of college, there are several options. Family members can gift or pay tuition directly to the college or university, without incurring any gift tax liability. They can also make contributions to a 529 account. An estate planning attorney will be able to help family members, so that their generosity aligns with their estate plan.

Reference: Michigan State University Extension (May 1, 2017) “Planning and paying for higher education”

∗ For more information about this and other similar topics, please visit: www.LambrosLawLLC.com or call us at: (401) 383-9899 .

How Boomers Can Lighten Their Tax Load While Helping with Preschool Costs

Here’s an opportunity for boomers to help their grandchildren attend the preschool of their parent’s dreams, while achieving some tax benefits, as reported in CNBC’s recent article, “Grandma to the rescue: The $20,000 way to cover preschool.” If the preschool qualifies, directly paying the costs could score you some major grandparent points and help with your estate tax burden.

One year of pre-kindergarten at a private elite school can cost thousands of dollars. Generous grandparents can pay these expenses and save on gift taxes. However, this takes some careful planning.

Grandparents can give money to their grandchildren in several ways, without being subject to gift taxes. First, you can make a gift up to the annual gift tax exclusion of $14,000 per recipient (or you and your spouse together can give away up to $28,000). You can also give money away under your lifetime gift tax exemption of $5.49 million, but whatever portion of this amount that you use in “taxable gifts” during your life, will decrease the amount you can pass to your heirs without an estate tax. If you are married, you and your spouse each are entitled to your own lifetime gift tax exemption of $5.49 million. Third, you can pay directly for the grandchild's tuition or medical expenses, even it is over the annual gift tax exclusion. However, the payments have to go directly to the service provider.

When it comes to preschool, you need to prove to the IRS that your grandchild's pre-kindergarten is educational. To qualify as a nontaxable gift, tuition payments to a preschool must be made to an "educational organization" as defined by the IRS. That means a regularly enrolled student body (no day-care) and the school must also have a regular faculty. A big issue with preschool is that it’s frequently considered custodial care, not educational.

If your grandchild's preschool won’t qualify as an "educational organization," but you still want to help them, consider these alternatives:

1. Pay for preschool, but stay under the limit;
2. Fund a 529 college-savings plan with a five-year front load, that’s up to $70,000 per beneficiary (the same as $14,000 annually for five years); or
3. Provide a low-interest intra-family loan, but talk to an estate planning attorney and draft a formal agreement with your adult child for this option.

All of these options, especially intra-family loans, do need the guidance of an estate planning attorney. After all, if you’re going to be generous, you’ll want to make sure to reap some of the rewards. You should also be sure to draft a formal agreement with your adult child, so there are no misunderstandings in the future.

Reference: CNBC (March 23, 2017) “Grandma to the rescue: The $20,000 way to cover preschool”

∗ For more information about this and other similar topics, please visit: www.LambrosLawLLC.com or call us at: (401) 383-9899 .