Wealth Preservation Techniques for/of the Affluent Welcome!! Richard A. Parchman, CPA, MS [email protected] @parchdaddy 210 862 1875 1 Pinnacle - Richard

Wealth Preservation Techniques for/of the Affluent

• Welcome!!• Richard A. Parchman, CPA, MS• [email protected]• @parchdaddy• 210 862 1875

1Pinnacle - Richard A. Parchman, CPA, MS

mailto:[email protected]

What We Will Cover• Tax Law Changes• Wills• Living Trusts/Revocable Trusts• Irrevocable Trusts• Incapacity• Overview of new Healthcare Bill• Roth-IRA Conversions• 529 Plans and Saving for College/Retirement• Retirement

Pinnacle - Richard A. Parchman, CPA, MS 2

The Planning Team• Tax Professional• Investment Advisor• Attorney• Insurance Professional• CPA• Actuary• Social Worker• Conservator• Banker• Geriatric Care Manager• Trust Officer• Clergy• Family Members


Facts• In 2009, 39.6 million persons over 65 in the U.S., 12.9%

of the population.• In 2030, 72.1 million Americans over 65 expected, 19%

of the population.• Among people turning 65 today, 69% will need some

form of long-term care, whether in the community or in a residential care facility.

• The median cost of full-time nursing home room is $81,030 – Genworth 2012 Cost of Care Survey. Average hourly rate for a licensed home health aide is $19 – yearly cost of $55,480 for eight hours of care a day.

• By 2020, 12 million older Americans will need long-care.


Facts (cont.)

• Only 35% of people with disabilities reported being employed full or part time, compared to 78% of those who do not have disabilities.

• Three times as many live in poverty with annual household incomes below $15,000.

• People with disabilities are much more worried about their future health and well-being. Half are worried about not being able to care for themselves or being a burden to their families, compared to a quarter of other Americans.


Facts (cont.)

• Although 76% of Americans believe having a Will is important, 70% don’t have a Will.

• Most people just don’t follow through with getting one.


Tax Law Change

• American Taxpayer Relief Act of 2012• Call it – Basically, President Clinton’s tax

structure• Higher individual rates and a phase out of

deductions.


Tax Law Changes for 2013• Preferential 15% capital gains rate increases to 20% in the

event your income exceeds $400,000 for a single and $450,000 for married filing joint.

• Top individual tax rate goes from 35% to 39.6% (36% bracket comes back as well) – Could be 43.4%!!!

• Itemized deduction personal exemption phase out.• Personal Exemptions phase out as well.• For the two above, phase out begins at $300,000 for a

married filing joint and $250,000 for single filer.• Back to having a marriage penalty!!


Estate TaxThe American Taxpayer Relief Act of 2012 made permanent some of the beneficial changes in Estate and Gift Taxes

•Historically, the lifetime exemption increased in stages from $675,000 to $3,500,000 in 2009.•The top estate tax rate also declined in stages from a high of 55% to 45% in 2009.•For 2010, there was no estate tax and the top gift tax rate is 35%.•Lifetime exemption for gifts was $1,000,000.•If no legislation was passed, 2011 estates and gifts would have been subject to pre-2001 Act rates (55%) and exemptions for both would have been $1,000,000.


Planning Items to Consider• Interest rates remain at historically low levels.

– Consider making intra-family loans.• Refinance your mortgage?

– 4.08% for 30 yr– 3.12% for 15 yr

• 10 yr Treasury at historic lows – still……– Consider seller-financed intra-family asset sales.

• Gift or sell assets which are eligible for a marketability or minority interest discount.

• Create Family Partnerships or LLCs for discount purposes.• Pay gift taxes!?• Make annual exclusion gifts.• Make educational and healthcare exclusion gifts.


American Taxpayer Relief Act of 2012 – Estate and Gifts

• For 2013, a U.S. citizen can gift up to $5,250,000 and not incur a gift tax.

• A married couple could gift up to $10,500,000.• The estate tax provisions now mirror the above

rules.• The top gift and estate tax rate is 40% from 35%.• The generation skipping tax also mirrors the

above.• This is a dramatic change. Now permanent. • It’s tax law, nothing is permanent!


Lifetime (Inter Vivos) Transfers• Usually in the form of transfers to Irrevocable Trusts.• Irrevocable! You give up dominion and control of assets transferred.• For tax purposes, this is a gift.• Reasons for such transfers:

– Estate Planning– Asset Protection

• Creditors• Medicaid/Nursing Home• Manage assets of younger generation• Divorce

• Be careful with offshore transfers to foreign countries/jurisdictions.• Testamentary (at death) trusts.


Wills• One of the oldest methods, or forms, in which a

decedent directs the distribution of assets.• Most all Wills are subject to Probate.• The Probate Judge will issue Letters Testamentary –

allowing the appointed Executor(s) to act on the Estate’s behalf.

• Wills may be contested.• The Probate process in Texas is rather straight forward,

whereas other States (CA, NY, and others) are more costly and time-consuming.

• Independent vs. Dependent administration.


Wills (cont.)• Passing “Intestate” is passing without a Will.• Without a Will, State Law determines eventual

ownership.• Without a Will, a surviving spouse may not receive the

entire estate when there are minor children.• With minor children, the Probate Court may appoint a

guardian whom you may not have chosen to manage the real estate/property for the children.

• Problem, the spouse may not be able to sell, rent, or refinance the property without a court order!

• Getting court orders is expensive and time consuming.


Wills (Cont.)• If the decedent has a large family, all of the heirs

will become co-owners and will have to manage the property together.

• Can you imagine?!!• They may not live in the same state.• They may not agree on what should be done with

the property.• What if some of the heirs do not have the

financial capacity to fund costs for managing and repairing the property?


Wills (cont.)

• Executing a Will ensures items pass to those you wish.

• It eliminates the need for others (State Law and Probate Court) to determine how items pass.

• Less costly and time-consuming for the survivors. • Wills, and the probate assets, are subject to

public inspection!• Travis County, TX.


Alternatives To Probate

• There are ways of passing property without a Will.

• Use of Beneficiary Designations– Required for life insurance and retirement plans.– No probate required– Review periodically


Alternatives To Probate (cont.)

• Form of Ownership– Separate property ownership– Tenant in common ownership– Joint tenants with right of survivorship– Tenancy by the entirety– Community property


Revocable Living Trusts

• No probate assets in the trust• Transparent for all other purposes• Additional benefits:

– Simple transfer of control to successor trustee at death or incapacity

– Document remains private– Avoid ancillary probate hearing

>>Avoiding probate not always desirable!!


Revocable Living Trusts (cont.)• Other possible benefits:

– Allows Settlor to control assets while alive– Can name successor trustee if current trustee is

incapacitated– Easy to amend, alter, or revoke– Can provide for potential estate tax savings (no more

than a Will)– Assets titled to trust prior to death do not require

probate proceedings– Great instrument if real property located in more than

one state– STILL NEED POUROVER WILL!!!


Digital Assets• Is this property?• Personal property:

• Tangible• Intangible

• When you hit the print button what is it?• Digital assets can be email accounts (Gmail or Yahoo!), pictures

stored online (Flickr or Picasa), videos or documents (YouTube or GoogleDocs), websites or blogs, online banking, investment or credit card accounts (PayPal or GoDaddy), and social networking accounts (Facebook, Twitter, or LinkedIn).

• How many different User I.D.’s and passwords do most individuals have for security reasons?

• Death or incapacity could create havoc!


Digital Assets• Not clear what rights an executor, agent, guardian, or beneficiaries

may have?• As of today, only Oklahoma and Idaho have created laws which

grants personal representatives the power to deal with some of these digital assets.

• May have to go to court for legal authority to access accounts.• Of course, certain online companies might resist access anyway.• Access may be needed to:

– Prevent identity theft– Prevent losses to the Estate– Avoid losing the deceased’s story– Prevent discovery of unwanted secrets!!!!


Digital Assets• Each online company/host has their own “deceased-user” policies.• There are several ways to plan for digital assets:

– Include in legal documents– Separate document– Online Afterlife Companies

• AssetLock• DataInherit• Dead Man’s Switch• Deathswitch• GreatGoodbye• If I Die• Last Post• Legacy Locker• Parting Wishes• SlightlyMorbid• Vital Lock

– Problems solved?


Incapacity

• Power of Attorney• Health Care Power of Attorney, Living Will,

and Advance Directive for Health Care• Do Not Resuscitate (DNR) Forms• Revocable Living Trust• Guardianship or Conservatorship


Power of Attorney (“POA”)• Is a simple, relatively inexpensive, legal document in which a client,

as principal, appoints another person as attorney-in-fact, or agent, to manage his financial or other affairs.

• State law governs the creation, termination, and uses of POAs.• Creates piece of mind that things are being taken (management of

assets) care of without delay in the event the person giving the power becomes permanently or temporarily disabled or incapacitated.

• Typically a Durable Power of Attorney should be drafted.• Some courts might appoint someone else even though a valid POA

exists. Remedy might be to appoint the same person as guardian in separate document.

• Difficulties arise at times where third parties may not rely on valid POA.

• Gifts??


Advanced Directives For Health Care

• Most states have enacted statutes which allow the individual to specify the nature of medical treatments desired or opposed and/or to designate a person to make medical decisions on the person’s behalf if unable to do so.

• These include Living Wills, Durable Power of Attorney for Healthcare, Health Proxies, and similar documents.


Living Wills• A Living Will (also called a Directive to Physicians) allows an

individual to express his or her desire about whether to be kept alive by extraordinary means in the even he or she is determined to be in a terminal condition.

• Determining if a terminal condition exists most times must be made by two physicians.

• The document directs the physician as to giving or withholding life-sustaining medical care.

• The Living Will may be broadened to circumstances beyond terminal conditions in most states.

• Example might be trauma which does not require life-sustaining procedures but person is in persistent vegetative state > withhold or provide artificial nutrition and hydration?

• The principal advantage of the living will is that it communicates the individual’s personal desires to the family, friends, and physician.


Durable Powers of Attorney for Health Care and Health Care Proxies

• Broader in scope than Living Wills.• Sometimes referred to as Medical Power of Attorney.• Not limited to imminent death situations and allow the

attorney-in-fact to make health care decisions on behalf of the principal.

• Often referred to as a “springing” power since the agent will be able to act only during the period of time that the principal is incapacitated.

• Example: If principal is sedated and undergoing surgery/treatment, it is possible that additional procedures might be necessary. This document will provide the power necessary for the physician to receive informed consent and receive permission to proceed.


Other Comments on “Powers”

• Old documents should be reviewed based on changes in federal and state statutes > Example: Health Insurance Portability and Accountability Act of 1996 (“HIPAA”)

• The U.S General Accounting Office (GAO) has reported that only 10-25% of Americans have executed health care advance directives or appointed a health care agent, and not all health care providers consistently document in patients’ medical records than an advance directive exists.


Retirement Benefits• Defined Contribution Plans• Defined Benefit Plans• 401(k)• Roth 401(k)• Hybrid Plans• Simple and Sep-IRAs• Individual Retirement Accounts• Beneficiary Designations• Distribution Options• Minimum Distribution Rules• Early Retirement


Early Retirement

• Investment assets• Health insurance• Severance benefits• Lifestyle questions• Retirement calculators



Education Provisions


IRC 529 Plans

• Room & Board• Tuition and Fees• Books, Supplies, and Equipment• Also special needs provisions• Only a Coverdell is this broad with regard to qualified

expenses


IRC 529 Plans

• History• Two types of plans

– Prepaid Tuition Plans– Savings Plans

• Each State or University has their own administrator of each plan => they make investment decisions, not the owner

• Plans will vary by costs and investment decisions


IRC 529 Plans

• Account is not an asset of the owner• Front-end loading by using “borrowed” annual

gift exclusions => $70,000 for 2013• The breadth of the kiddie tax is making these

very powerful – UGMA/UTMA’s weakened• NO AGI Limitation!!!


IRC 529 Conclusion

• Shop around• Each plan has their own investment profile

and manager which may not mesh with the owner

• Detailed reviews could be time-consuming • Texas, historically, has ranked near the

bottom• www.savingforcollege.com

http://www.savingforcollege.com/

Health Care Act

• Patient Protection and Affordable Care Act, and

• Health Care and Education Reconciliation Act of 2010

• Passed in late March of 2010.• Supreme Court to ruled in favor.


Health Care Act – 2010• Tanning services excise tax

– New 10% excise tax imposed on any indoor tanning service• Small employer health insurance credit

– Eligible small employer (ESP) is one with 25 or fewer employees– Wages average no more than $50k– GAO report, GAO-12-649, reports the following:

– Est. 1.4M to 4m eligible for credit, but only 170k claimed the credit– Of the 170k, only 28k (17%) claimed the full credit– Why?

– Many small businesses don’t offer health insurance and credit is not enough to make it worthwhile

– Six year life of credit– Complexity of credit calculation– Time/Cost to comply

• Expanded dependent coverage to any child of an employee 26 and younger


Health Care Act – 2011 • W-2 must include cost of employer-provided

health insurance• Restricted definition of medicine for health

reimbursement plans– Over-the-counter medicines can’t be reimbursed with

funds from flexible spending accounts (FSA), health reimbursement accounts (HRA), health savings accounts (HSA), or Archer MSAs.

– Unless medicine prescribed by a doctor.• Small employers may establish “simple cafeteria

plans”


Health Care Act - 2013


Health Care Act – Cont.• Large employers not offering affordable health

insurance coverage and individuals not carrying health insurance face a penalty beginning in 2014.

• Beginning in 2018, an excise tax will be imposed on high-cost employer provided health insurance coverage.– If annual premiums exceed $10,200 for single and

$27,500 for family coverage– 40% nondeductible excise tax levied on insurance

companies and plan administrators


Roth IRA Conversions• How it works:

– Money is transferred to the Roth IRA from a taxable account (IRA, 401(k), 403(b)…etc) directly into a Roth IRA.

– In-plan conversions are now allowed.– Taxpayer must pay income tax on the conversion – no 10% early

withdrawal penalty applies.– Roth IRAs

• Grow tax-deferred• Future withdrawals are not income• Not subject to RMD’s (required minimum distributions at 70 ½)• Can contribute to Roth IRA even after 70 ½.


Roth IRA Conversion• Is this a good idea for you?• Each person is different.• Factors to consider:

– Do you have outside funds to pay for the tax on the conversion?– When will you need the converted funds?– Time horizon?– Future tax rate assumptions?– Stock market conditions?– Time value of money? Paying tax today versus later?– How will the income recognition on conversion impact other items?

• AGI sensitive deductions• Financial Aid (“FAFSA”)• Medicare Part B premiums• Taxable amount of Social Security• Others?


Roth IRA Conversion

• Final Comments– Seek professional assistance before converting to

make sure all factors are considered.– Will this “loophole” be closed down soon”?– Be careful of salespersons with “creative”

strategies on Roth IRA Conversions– It is reversible - planning


Questions/Comments

• Thanks for having me…………


Documents

Wealth Preservation Techniques for/of the Affluent Welcome!! Richard A. Parchman, CPA, MS [email protected] @parchdaddy 210 862 1875 1 Pinnacle - Richard