Amy & Dan Smith's Planning for Life: Gift and Estate Tax: Where Are We Now?

Changes in the tax law have created some confusion regarding the current state of taxes associated with the transfer of assets both at death (estate tax) or during lifetime (gift tax). A brief summary of the current tax law may be helpful to some of our readers.

Estate Tax: The taxation of estates can apply on two levels: federal and state.

With regard to federal estate tax, the exemption is now $11,400,000 per person. The exemption amount is to be increased annually by C.P.I. adjustment. Furthermore, the law contains a provision for “portability.” This means that, as between a married couple, the unused portion of the exemption of the first spouse to die can be preserved and utilized at the death of the second spouse by filing a simplified estate tax return. This (increased by C.P.I. adjustment of the second spouse’s exemption) at his/her death. The law creating this increased exemption is due to expire at the end of 2025, unless it is then extended. If allowed to expire, the exemption will revert to the amount existing before the change in the tax law increased by C.P.I. adjustment, estimated at $5,600,000 per person. The provision allowing portability is not set to expire.

Virginia does not have a state estate tax. However, both Maryland and D.C. have estate taxes which apply in addition to the federal estate tax.

There is one other type of “death tax” which can affect a beneficiary of an estate: the inheritance tax. Whereas an estate tax is a tax on the totality of a decedent’s assets which pass at his/her death, the inheritance tax applies to the share of the estate which a beneficiary receives. It applies even if an estate tax is also to be paid on the same share. Fortunately, very few states have an inheritance tax. In our area only Maryland has an inheritance tax. Thus, the estate of a Maryland decedent could be subjected to both federal and state estate taxes, and the beneficiary could be subjected to an inheritance tax on his/her share of the estate. (Some advice: “Don’t be caught dead in Maryland.”)

Gift Tax: The current amount which may be given annually without any gift tax consequences is $15,000 (“the annual exclusion”). This amount is subject to annual C.P.I. increases. For example, a husband and wife may each give $15,000 per year to their son or grandchild or friend. So long as the gift is within the annual exclusion amount, no gift tax return is required to be filed.

If a gift from a donor to a person exceeds the annual exclusion amount, the donor is required to file a gift tax return. The purpose of this return is to show the IRS what part of the donor’s exemption is being utilized by this gift. The gift tax exemption is the same amount as the estate tax exemption and is also to be increased by C.P.I. adjustments. Thus, if Mother gives a gift of $115,000 to Daughter, Mother would use $100,000 of her exemption that year. As with the estate tax exemption, the amount of the gift tax exemption is to revert to its level prior to the tax law changes at the end of 2015 unless the law is extended.

One note on gifts during lifetime: they carry the same basis to the donee which they had in the hands of the donor. This does not apply to gifts of cash, but should be a consideration with other gifts. For example, assume Father paid $5 for a share of GE stock. If Father gives that to Junior at a time when the stock is selling for $10 and Junior sells at that price, Junior has a capital gain of $5 which he must report on his income tax return. (Note: there is no tax to Junior for receiving the gift.) However, if Junior inherits the stock from Father at his death, Junior takes a “stepped up” basis; that is, the value of the stock at the time of Father’s death. In this way, significant capital gains can be avoided.

From "Amy & Dan Smith's Planning for Life" column appearing monthly in the Blue Ridge Leader, Loudoun County, VA.

Investment advisory services are offered through Amy V. Smith Wealth Management, LLC. Amy V. Smith Wealth Management, LLC, is not a registered broker/dealer and is independent of Raymond James Financial Services. Raymond James and its advisors do not offer tax or legal advice. You should discuss tax or legal matters with the appropriate professional. Dan Smith is not affiliated with Raymond James or Amy V. Smith Wealth Management, LLC. Amy V. Smith Wealth Management is located at 161 Fort Evans Road, NE Suite 345, Leesburg, VA 20176. Telephone 703 669-5022.

Amy & Dan Smith's Planning for Life: Applying for Medicaid Benefits

How do you apply for Medicaid?

Because Medicaid is administered by the states, each state has its own eligibility requirements and available benefits. Considerable variation can exist.

To apply for Medicaid, you or your representative must use a written application on a form prescribed by your state and signed under the pains and penalties of perjury. Give the application to your state Medicaid office.

What information must you disclose?

The Medicaid application process will require the disclosure of certain personal information, including:

• Proof of age, marital status, residence, and citizenship (or lawful alien status).

• Social Security number.

• Verification of receipt of other government benefits, such as Social Security, SSI, AFDC, and veterans’ benefits.

• Verification of all sources of income and assets for you and spouse. (Regarding assets, an indication as to how title is held (jointly, etc.) should be required.)

• A description of any interest you or your spouse has in an annuity (or similar financial instrument) regardless of whether the annuity is irrevocable or is treated as an asset.

• Lists of all transfers of income and assets within the applicable look-back period. This should include dates of transfer, name of transferee, consideration (if any) for transfer, and purpose of transfer.

For transfers made on or after February 8, 2006 (the date of enactment of the Deficit Reduction Act of 2005), the look-back period is 60 months for all transfers. The waiting period begins on: (1) the first day of the month during or after which assets have been transferred, or (2) the date of first possible eligibility for Medicaid (but for the penalty period), whichever is later.

Federal law generally requires state agencies to determine an applicant’s eligibility for Medicaid within 90 days for those who apply on the basis of disability and within 45 days for all other applicants. State agencies must send each applicant a written notice of its decision. If the application is approved, the applicant will be notified of the effective date of his or her Medicaid eligibility (which can cover a retroactive period of up to 90 days from the date of the application), as well as a calculation of the applicant’s “patient paid amount” or the amount of the monthly medical expenses that the applicant will be responsible for paying from his or her own income. If eligibility is denied, the reasons for the denial must be outlined, the relevant regulation cited, and an explanation of appeal rights outlined.

What are your appeal rights?

Federal law requires states to provide an opportunity for a fair hearing before the state Medicaid agency to any individual whose claim for medical assistance is denied or not acted upon with reasonable promptness or to any recipient who believes the agency has acted erroneously. To appeal, you must sign the request for a fair hearing within the time stated on the notice of denial. The time frame is generally anywhere from 30 to 90 days.

Hearings are handled by administrative officers, with review authority in state courts of appeal, federal circuit courts of appeal and, ultimately, the U.S. Supreme Court.

If the hearing decision is favorable to the applicant, the state Medicaid agency must make corrective Medicaid payments retroactive to the date an incorrect action was taken.

From "Amy & Dan Smith's Planning for Life" column appearing monthly in the Blue Ridge Leader, Loudoun County, VA.

The foregoing article contains general legal information only and is not intended to convey legal advice.  For legal advice regarding estate planning, the reader should contact his/her lawyer.

Daniel D. Smith is a partner in the law firm of Smith & Pugh, PLC, 161 Fort Evans Road, NE, Suite 345, Leesburg, VA 20176. (Tel: 703-777-6084, www.smithpugh.com). He has practiced law in Loudoun County since 1980.

Amy & Dan Smith's Planning for Life: 12 Financial Resolutions

Review and revamp your financial plan all year long

Instead of hauling out those familiar New Year’s resolutions about eating less and exercising more, how about focusing on something that’s also very good for you in the long run-and even sooner? We’re talking about your financial plan-your fiscal health, if you will. The approach of a new year – or any time, for that matter – is a great time to review your plan and make whatever revisions might be indicated. With that in mind, here are 12 suggested resolutions that, if followed, could help you go a long way toward attaining your financial goals.

Get your balance sheet in order – using December 31 as the effective date, update your personal balance sheet (assets versus liabilities, broadly speaking.)

Review your budget and spending habits – how close did you come to what you had planned to spend last year? Where did you go off-track and what can you do about that?

Review the titling of your accounts – account titling is more than just using the right form – it can also be a tool for estate planning. Review your account titling and determine if that’s still the arrangement you want.

Designate and update your beneficiaries – if you don’t correctly document and update your beneficiary designations, who gets what may be determined not according to your wishes but by federal or state law.

Evaluate your cash holdings – everyone should have a certain amount of their assets set aside in cash.

Revisit your portfolio’s asset allocation – are you comfortable with the current amount of risk in your portfolio?

Evaluate your sources of retirement income – every individual picture is different. Think about how secure each source is.

Review your Social Security statement – use the SSA’s online calculator to compute your benefits at various retirement ages

Review the tax efficiency of your charitable giving – give, but do so with an eye toward reducing your tax liability.

Check to see if your retirement plan is on track – retirement has a lot of moving parts that must be monitored and managed on an ongoing basis.

Make the indicated changes – go after any problem areas – or opportunities-systematically and promptly.

Set up a regular review schedule with your advisor – establish a regular schedule for getting together and reviewing your portfolio, your financial and retirement plans, and what’s happening in your life.

Since we all know that resolutions tend not to survive very long, add one more to make this a baker’s dozen. Resolve to really follow through on these – and give yourself permission to spend a day lazing around watching movies and eating ice cream when you’re done! Just one day though.

From "Amy & Dan Smith's Planning for Life" column appearing monthly in the Blue Ridge Leader, Loudoun County, VA.

The foregoing article contains general legal information only and is not intended to convey legal advice.  For legal advice regarding estate planning, the reader should contact his/her lawyer.

Daniel D. Smith is a partner in the law firm of Smith & Pugh, PLC, 161 Fort Evans Road, NE, Suite 345, Leesburg, VA 20176. (Tel: 703-777-6084, www.smithpugh.com). He has practiced law in Loudoun County since 1980.

Amy & Dan Smith's Planning for Life: What Happens to my Debt when I Die?

A question often asked by an heir of an estate or a person who has been nominated to be the administrator of an estate is: Am I going to be personally liable for the debts of the decedent? The answer is that, unless you undertook joint liability with the decedent during his/her lifetime, as a general rule you will not be liable for his/her debts. Nevertheless, the debt of a decedent can affect the heirs significantly.

If husband and wife signed a mortgage as owners of the residence and one of them dies, the survivor continues to be liable for the mortgage debt. The survivor may be able to adjust payments to manage the debt burden, but failure to make the required payments could lead to foreclosure.

If the debt is owed by the decedent alone (that is, there is not a joint debtor), then the estate of the decedent is liable for the debt. This can affect the heirs in different ways. For example, assume that the decedent had a car loan. If the estate does not have sufficient assets to pay off the loan, the car may be repossessed and resold. To the extent that the value of the car is insufficient to pay off the loan, the creditor (e.g., the bank or other financing company) can attempt to recover the remainder of the debt from the estate. Secured creditors (e.g., the car lender) come before the priority list of creditors discussed below.

Creditors holding unsecured loans fall into the category of “General Creditors.” An example would be a credit card issuer. Assuming that no one was on the credit card except the decedent, the balance due at the time of death is a debt of the estate. Here’s how that works. Pursuant to statute, creditors have different levels of priority in their claims against the estate. Costs of administration of the estate, family and spousal statutory allowances, funeral expenses, federal and state tax liabilities, and some medical expenses are at the top of the priority list. At the bottom of the list are general creditors. After payment of the priority creditors, the general creditors share proportionately in whatever assets remain. Subject to some exceptions, only after all the creditors are paid do the heirs receive their shares. Thus, even though an heir is not personally liable for the debt of his/her decedent, such debt can directly affect his/her inheritance.

The term “estate” applies to assets passing under a will or by intestacy. It is important to note that the claims of creditors apply equally to the revocable trust of a decedent which he/she created during lifetime, even though assets transferred into that trust during lifetime avoid probate.

An estate administrator incurs no personal liability for the decedent’s debts simply by assuming the office of administrator. However, the administrator can incur liability by failing to administer the estate according to the rules and safeguards established under the Virginia Code. For example, paying a general creditor ahead of a priority creditor can generate personal liability for the administrator.

There are some circumstances (beyond the scope of this article) where the assets of the estate after passing into the hands of an heir can be recalled to pay debts of the estate. The heir is not personally responsible for the debt but the asset(s) he/she receives may be subjected to a claim of an estate creditor.

From "Amy & Dan Smith's Planning for Life" column appearing monthly in the Blue Ridge Leader, Loudoun County, VA.

The foregoing article contains general legal information only and is not intended to convey legal advice.  For legal advice regarding estate planning, the reader should contact his/her lawyer.

Daniel D. Smith is a partner in the law firm of Smith & Pugh, PLC, 161 Fort Evans Road, NE, Suite 345, Leesburg, VA 20176. (Tel: 703-777-6084, www.smithpugh.com). He has practiced law in Loudoun County since 1980.

Amy & Dan Smith's Planning for Life: Caregiver Connections

Whether in-person or online, connections fostered among caregivers provide long-range benefits.

As the populations for our country ages, the face of caregiving is changing along with it.  Today, 80 percent of those providing long-term care in the United States are not healthcare professionals-instead they are family members and even friends.  There are 40.4 million unpaid caregivers of adults ages 65 and older in the United States.  Most help one aging loved one, but 22 percent help two, and an impressive, but likely overwhelmed, 7 percent help three or more.*

With this shift from the clinical to the familial comes another change. A majority of those same individuals do not self-identify as “caregivers,” despite providing assistance to loved ones on a regular basis.  This may not seem like a problem, until you consider that caregivers who don’t truly understand their role are less likely to connect with those around them, for support and encouragement.

A Caring Community

Fostering connections with those who understand what you’re going through can make the road you’re traveling easier to navigate. By standing together, caregivers create a community through shared experiences that’s widespread and accessible anywhere, both in their local area and through online platforms.

Many caregivers enjoy participating in community events, attending support groups or gathering over brimming cups of coffee.  Group text messages are easy to create and maintain, and provide a safe space to exchange well wishes, best practices, uplifting messages and more. Scheduling regular get-togethers with nearby caregivers is another way to connect, providing an outlet as well as a wealth of resources.

Tap Into Your Virtual Network

An internet connection can also play an important role in your caregiving experience, cluing you into new advances in medicine and technology. Not only that, but a majority of caregivers who have accessed online information say that it has helped them cope with stress.

When venturing into online spaces, search out message boards with discussions that reflect your own experiences, pencil in video chat dates with faraway friends, and read up on all the internet has to offer-from in-depth research to lighthearted blog posts.  There’s no limit to what you can find.

Connect and Reflect

As a caregiver, you’re a part of a community of empowered individuals who give themselves to better the lives of those they love.  And since we’re on the topic of connections, it’s important not to forget the greatest connection that can be strengthened during your time as a caregiver; the one you share and are fostering each day with your loved one.

Next Steps

Connect with someone who can relate to your caregiving experience.

Explore a message board for added caregiving insight.

Have a conversation with your advisor about the financial implications of caregiving.

Sources: bls.gov,pewinternet.org; *Pew Research Center

From "Amy & Dan Smith's Planning for Life" column appearing monthly in the Blue Ridge Leader, Loudoun County, VA.

The foregoing article contains general legal information only and is not intended to convey legal advice.  For legal advice regarding estate planning, the reader should contact his/her lawyer.

Daniel D. Smith is a partner in the law firm of Smith & Pugh, PLC, 161 Fort Evans Road, NE, Suite 345, Leesburg, VA 20176. (Tel: 703-777-6084, www.smithpugh.com). He has practiced law in Loudoun County since 1980.

Amy & Dan Smith's Planning for Life: Insurance—What’s the Use of It?

It’s like putting money down a black hole – Until You Need It! It is the major, unplanned-for loss that permanently wrecks financial well-being. Consider the following:

Major illness: Paying the premiums and then the deductible is annoying. However, failure to cover the possibility of a long-term illness can devastate savings and, even, lead to bankruptcy.

Fire: The loss of a residence seems remote to most folks. However, it happens. If there is inadequate coverage, comparable replacement may not be possible. At the same time the mortgage must be paid.

Liability: Harm to an individual – eg., an invited guest or a random victim in a car accident – can be emotionally gut-wrenching. One can be charged with liability for his/her actions which arguably caused injury to a friend or family member as well, of course, to a stranger. Having ample liability coverage – and, I would suggest, an umbrella policy – does give some peace of mind even though it may not remove the personal pain. Also, not having to pay lawyers to defend you (they are paid by your insurance company) can help relieve much stress.

Disability: The inability to function in the workplace due to disease or accident can put an abrupt end to the income stream which is supporting the family in whole or in part. Income replacement policies are expensive and are often not part of the employment package provided by employers. Furthermore, there are vast differences among policies — e.g., the definition of “disability,” waiting period before coverage begins, length of time the benefit is paid, etc. High quality policies are more expensive. Honestly, this is a difficult area of risk management, and hopefully it will not be needed. For the major bread-earner, however, it is an essential element for financial well-being of the family.

Long term care: Medicare does not provide long term care. The need for in-home care or residential assisted living must be self-insured. Having a policy can mean the difference between staying at home or having to going into residential living. It also gives peace of mind to parents who are not wanting to deplete the children’s inheritance. The cost of the long-term care policy depends on the “bells and whistles” one contracts for – eg, waiting period, length of time the benefit will pay, the amount of the benefit, and whether there is an inflation adjustment to the benefit. It is not too early for folks in their late 40’s to begin to look at these policies. The earlier coverage begins, the lower the premium.

Life: This is certainly an area where you hope the insurance company wins the bet; that is, that you live a long life! The type of policy one obtains—permanent vs term — depends on the risk that the loss of the insured poses. The major bread-earner with young children certainly needs to cover potential child care and education costs. Even the non-income producing spouse should have some coverage. Typically, cost of term insurance for parents with young children is inexpensive; however, it is the time of life when insurance is most needed.

Your author does not sell insurance. However, he has personally experienced the loss of his residence by fire, the long-term illness and death of a loved one, and a disability. The value of appropriate insurance at the right time cannot be overstated.

From "Amy & Dan Smith's Planning for Life" column appearing monthly in the Blue Ridge Leader, Loudoun County, VA.

The foregoing article contains general legal information only and is not intended to convey legal advice.  For legal advice regarding estate planning, the reader should contact his/her lawyer.

Daniel D. Smith is a partner in the law firm of Smith & Pugh, PLC, 161 Fort Evans Road, NE, Suite 345, Leesburg, VA 20176. (Tel: 703-777-6084, www.smithpugh.com). He has practiced law in Loudoun County since 1980.

Amy & Dan Smith's Planning for Life: New Reports Highlight Continuing Challenges for Social Security and Medicare

Most Americans will receive Social Security and Medicare benefits at some point during their lives. For this reason, workers and retirees are concerned about potential program shortfalls that could affect future benefits.  Each year, the trustees of the Social Security and Medicare trust Funds release lengthy annual reports to Congress that assess the health of these important programs.  The newest reports, released on June 5, 2018, discuss the current financial condition and ongoing financial challenges that both programs face, and project a Social Security cost-of-living adjustment (COLA) for 2019.

What are the Social Security and Medicare Trust Funds?

Social Security: The Social Security program consists of two parts. Retired workers, their families, and survivors of workers receive monthly benefits under the Old Age and Survivors Insurance (OASI) program; disabled workers and their families receive monthly benefits under the Disability Insurance (DI) program. The combined programs are referred to as OASDI. Each program has a financial account (a trust fund) that holds the Social Security payroll taxes that are collected to pay Social Security benefits.  Other income (reimbursements from the General Fund of the U.S. Treasury and income tax revenue from benefit taxation) is also deposited in these accounts.  Money that is not needed in the current year to pay benefits and administrative costs is invested (by law) in special Treasury bonds that are guaranteed by the U.S. government and earn interest.  As a result, the Social Security Trust Funds have built up reserves that can be used to cover benefit obligations if payroll tax income is insufficient to pay full benefits.
 
Note that the trustees provide certain projections based on the combined OASI and DI(OASDI) trust funds.  However, these projections are theoretical, because the trusts are separate, and generally one program’s taxes and reserves cannot be used to fund the other program.

Medicare:  There are two Medicare trust funds.  The Hospital Insurance (HI) Trust Fund helps pay for hospital care (Medicare Part A costs). The Supplementary Medical Insurance (SMI) trust Fund comprises two separate accounts, one covering Medicare Part B (which helps pay for physician and outpatient costs) and one covering Medicare Part D (which helps cover the prescription drug benefit).

Highlights of Social Security Trustees Report 

This year, for the first time since 1982, Social Security’s total cost is projected to exceed its total income (including interest) and remain higher for the next 75 years. Consequently, the U.S. treasury will start withdrawing from trust fund reserves to help pay benefits in 2018.  The trustees project that the combined trust fund reserves (OASDI) will be depleted in 2034, the same year projected in last year’s report, unless Congress acts.

Once the combined trust fund reserves are depleted, payroll tax revenue alone should still be sufficient to pay about 79 percent of scheduled benefits for 2034, with the percentage falling gradually to 74 percent by 2092.
Based on the intermediate assumptions in this year’s report, the Social Security Administration is projecting that the cost-of-living adjustments (COLA) announced in the fall of 2018, will be 2.4 percent. The COLA would apply to benefits starting in January 2018.

Highlights of Medicare Trustees Report

Annual costs for the Medicare program exceeded tax income each year from 2008 to 2015. Although last year’s report projected surpluses in 2016 through 2022, this year’s report projects that costs will exceed income (excluding interest income) in 2018.

The HI trust fund is projected to be depleted in 2026, three years earlier than projected last year. Once the HI trust fund is depleted, tax and premium income would still cover 91 percent of estimated program costs, declining to 78 percent by 2042 and then gradually increasing to 85 percent by 2092. The Trustees note that long-range projection of Medicare costs are highly uncertain.

Why are Social Security and Medicare facing financial challenges?

Social security and Medicare are funded primarily through the collection of payroll taxes. Because of demographic and economic factors including higher retirement rates and lower birth rates, there will be fewer workers per beneficiary over the long term, worsening the strain on trust funds.

What is being done to address these challenges?

Both reports urge Congress to address the financial challenges facing these programs soon, so that solutions will be less drastic and may be implemented gradually, lessening the impact on the public.

You can view a combined summary of the 2018 Social Security and Medicare Trustees Reports and a full copy of the Social Security report at ssa.gov. You can find the full Medicare report at cms.gov.

From "Amy & Dan Smith's Planning for Life" column appearing monthly in the Blue Ridge Leader, Loudoun County, VA.

The foregoing article contains general legal information only and is not intended to convey legal advice.  For legal advice regarding estate planning, the reader should contact his/her lawyer.

Daniel D. Smith is a partner in the law firm of Smith & Pugh, PLC, 161 Fort Evans Road, NE, Suite 345, Leesburg, VA 20176. (Tel: 703-777-6084, www.smithpugh.com). He has practiced law in Loudoun County since 1980.

Amy & Dan Smith's Planning for Life: Get Financially Fit

Eight moves to whip your tax strategy into shape

Tax season isn’t the only time you should be mindful of your taxes. Challenge yourself to tone up your tax strategy and help you keep your taxes in top form year-round. Of course, also be sure to consult your tax professional and financial advisor.

1. FIND A TRAINER
You’ll want a heavyweight tax professional in your corner. Don’t have one? Ask your financial advisor, other professionals, friends and family for a recommendation and get interviewing. You’ll need a tax trainer to keep you focused.

2. TAX IT TO THE MAX
Push your retirement contribution to the limit. For 2018, you can add $18,500 to your employer-sponsored plan and/or $5,500 to an IRA, with additional $6,000/$1,000 catch-up contributions if you’re over 50. Ask your advisors for details. Bulking up your tax-advantaged savings trims your taxable income, too.

3. DIG DEEP
Look long and hard how your life has changed since the last tax season. Did you get married, have a baby, or send a son or daughter to college? Make sure you understand how life changes can impact your tax bill.

4. CRUNCH YOUR NUMBERS
Your employer withholds a certain amount of pay for taxes based on your W-4, which outlines the exemptions you want to claim. Withhold too much and you’re giving the IRS an interest-free loan; too little and you’ll owe. Find the number that’s just right by using the withholding calculator on the IRS website (irs.gov/Individuals/IRS-Withholding-Calculator) or discussing your W-4 with your tax pro.

5. GET DISCIPLINED
Getting your taxes in shape takes dedication and commitment. Diligently track and review your deductible expenses, donations and mortgage interest, as well as any credits you’re eligible for. Don’t forget relevant documentation.

6. NO GAINS, NO PAIN
If you sell an appreciated asset, you’ll need to pay resulting capital gains taxes. You can use the proceeds or pump up savings. While you’re at it, check out any capital losses you may have on the books, too.

7. LOSE THE WEIGHT
Cut loose any investments that are weighing down your portfolio to offset gains from the winners. This strategy is called tax-loss harvesting.

8. SET A GOAL
Flex the power of your generosity by focusing your giving strategy on a specific location or single cause. A more organized and tax-efficient approach, perhaps through a donor-advised fund or other dedicated vehicle, could help you help others more effectively.

Discuss these steps and others with your professional tax advisor; your financial advisor can help coordinate the conversation. Then you can relax, knowing you’re in great shape for the next tax season.

NEXT STEPS
• Familiarize yourself with tax-saving strategies
• Make a commitment to be mindful of taxes year-round
• Consult your tax professional and financial advisor

From "Amy & Dan Smith's Planning for Life" column appearing monthly in the Blue Ridge Leader, Loudoun County, VA.

The foregoing article contains general legal information only and is not intended to convey legal advice.  For legal advice regarding estate planning, the reader should contact his/her lawyer.

Daniel D. Smith is a partner in the law firm of Smith & Pugh, PLC, 161 Fort Evans Road, NE, Suite 345, Leesburg, VA 20176. (Tel: 703-777-6084, www.smithpugh.com). He has practiced law in Loudoun County since 1980.

Amy & Dan Smith's Planning for Life: Closing a Retirement Income Gap

When you determine how much income you’ll need in retirement, you may base your projection on the type of lifestyle you plan to have and when you want to retire. However, as you grow closer to retirement, you may discover that your income won’t be enough to meet your needs.  If you find yourself in this situation, you’ll need to adopt a plan to bridge this projected income gap.

Delay retirement: 65 is just a number

One way of dealing with a projected income shortfall is to stay in the workforce longer than you had planned.  This will allow you to continue supporting yourself with a salary rather than dipping into your retirement savings.  Depending on your income, this could also increase your Social Security retirement benefit. You’ll also be able to delay taking your Social Security benefit or distributions from retirement accounts.

At normal retirement age (which varies, depending on the year you were born), you will receive your full Social Security retirement benefit. You can elect to receive your Social Security retirement benefit as early as age 62, but if you begin receiving your benefit before your normal retirement age, your benefit will be reduced.  Conversely, if you delay retirement, you can increase your Social Security benefit.

Remember, too, that income from a job may affect the amount of Social Security Retirement benefit you receive, if you are under normal retirement age.  Your benefit will be reduced by $1 for every $2 you earn over a certain earnings limit ($16,920 in 2017, up from $15,720 2016.) But once you reach normal retirement age, you can earn as much as you want without affecting your Social Security retirement benefit.

Another advantage of delaying retirement is that you can continue to build tax-deferred (or in the case of Roth accounts, tax-free) funds in your IRA or employer-sponsored retirement plan. Keep in mind, though, that you may be required to start taking minimum distributions from your qualified plan retirement or traditional IRA once you reach 70-1/2, if you want to avoid harsh penalties.
And if you’re covered by a pension plan at work, you could also consider retiring and then seeking employment elsewhere.  This way you can receive a salary and your pension benefit at the same time.  Some employers, to avoid losing talented employees this way, are beginning to offer “phased retirement” programs that allow you to receive all or part of your pension benefit while you’re still working. Make sure you understand your pension plan options.

Spend less, save more

You may be able to deal with an income shortfall by adjusting your spending habits.  If you’re still years away from retirement, you may be able to get by with a few minor changes.  However, if retirement is just around the corner, you may need to drastically change your spending and savings habits.  Saving even a little money can really add up if you do it consistently and earn a reasonable rate of return.  Make permanent changes to your spending habits and you’ll find that your savings will last even longer.  Start by preparing a budget to see where your money is going.  Here are some suggested ways to stretch your retirement dollars:

• Refinance your home mortgage if interest rates have dropped since you took the loan.

• Reduce your housing expenses by moving to a less expensive home or apartment.

• Sell one of your cars if you have two. When your remaining car needs to be replaced, consider buying a used one.

• Access the equity in your home. Use the proceeds from a second mortgage or home equity line of credit to pay off higher-interest-rate debts.

• Transfer credit card balances from higher-interest-rate card to a low-or no-interest card, and then cancel the old accounts.

• Ask about insurance discounts and review your insurance needs (e.g., your need for life insurance may have lessened).

• Reduce discretionary expenses such as lunches and dinners out.

Accept reality: lower your standard of living

Once you are within a few years of retirement, you can prepare a realistic budget that will help you manage your money in retirement.  Think long term. Retirees frequently get into budget troubles in the early years of retirement, when they are adjusting to their new lifestyles. Remember that when you are retired, every day is Saturday, so it’s easy to start overspending.

From "Amy & Dan Smith's Planning for Life" column appearing monthly in the Blue Ridge Leader, Loudoun County, VA.

The foregoing article contains general legal information only and is not intended to convey legal advice.  For legal advice regarding estate planning, the reader should contact his/her lawyer.

Daniel D. Smith is a partner in the law firm of Smith & Pugh, PLC, 161 Fort Evans Road, NE, Suite 345, Leesburg, VA 20176. (Tel: 703-777-6084, www.smithpugh.com). He has practiced law in Loudoun County since 1980.

Amy & Dan Smith's Planning for Life: Trusts for Children

Most parents are aware of the need to appoint a guardian for their children in case of their deaths before the child reaches 18. This is accomplished in a properly executed will. A guardian is responsible for the person of the child: what he/she eats and wears; where the child lives and goes to school. Thought needs to be given to the estate of the child; that is, the inheritance that the child will be receiving. Guardianship does not automatically include control of the child’s financial assets.

Many alternatives exist for the handling of a child’s finances. The simplest method is to appoint a custodian to control the funds under the Uniform Transfer to Minors Act (“UTMA”). Under the provisions of this law, the custodian is authorized to invest the funds and to spend them for the support and education of the child. It is important to know that the child can demand that the account be turned over to him at age 18 unless (21) is added to the title. For example, a clause in the will could read “a one-half share to my son Frankie to be held by John Smith as custodian under the Uniform Transfer to Minors Act (21).”

To retain control of a child’s share beyond the age of 21, a parent must establish a trust for the child. This trust can be set up to take effect at the death of the parents if the child is then under a certain age. A trustee would be appointed in the document (a will or living trust) to control the funds until the child reached the age where the parents thought he/she would be sufficiently responsible to take ownership of the account. Thus, the provision could state that, when the parents are deceased, the inheritance for a child under the age of, say, 30 would be held until the child reaches 30. Until then the trustee may distribute such amounts of income and principal as may be necessary from time to time for the health, education, support and maintenance of the child. The trust may also allow distributions of principal at certain ages such as ½ and 25 and the balance at 30, or a certain sum upon graduation from college.

Increasingly we are seeing another use of trusts for children. Parents, concerned that the inheritance they give to their children may be lost to a creditor of the child or through a bad marriage, are establishing trusts that will last the lifetimes of their children. Parents will set up separate trusts to take effect at the death of the second of them to die for each of their children, no matter what the age of the child. These trusts typically require that all the income generated by the funds (dividends and interest) be paid out automatically to the beneficiary and give the trustee broad discretion to distribute principal as needed for the beneficiary or his/her children. Whatever balance is left at the death of the child can be directed to be distributed to his/her children, and often the child will be given the right to appoint the balance then remaining among his/her children as seems appropriate. This allows the child to place assets where most needed among the children.

The benefit of a lifetime trust for the child is that it keeps the inheritance segregated from marital assets and, thus, free of the claims of creditors and a divorcing spouse. Too, if the trust is properly drafted, the child can be the trustee for his/her own trust and therefore retain control over the funds.

From "Amy & Dan Smith's Planning for Life" column appearing monthly in the Blue Ridge Leader, Loudoun County, VA.

The foregoing article contains general legal information only and is not intended to convey legal advice.  For legal advice regarding estate planning, the reader should contact his/her lawyer.

Daniel D. Smith is a partner in the law firm of Smith & Pugh, PLC, 161 Fort Evans Road, NE, Suite 345, Leesburg, VA 20176. (Tel: 703-777-6084, www.smithpugh.com). He has practiced law in Loudoun County since 1980.