Financial Planning

At the beginning of each year, many of us create resolutions for saving and spending.

This year it is especially vital to understand a crucial policy change MMthat Congress passed late last year as part of a budget deal. In it, Congress phased out a Social Security claiming strategy called “File & Suspend/Restricted Spousal Application.”

This news caused quite a stir, particularly because there has been much concern over the viability of the Social Security program. As pensions become less common, Social Security is quickly becoming the backbone of retirement for many.

Strategies vary based on marital status, earnings and disability history. Social Security benefits can be con- fusing and policy changes may seem alarming. Between the various claiming options, updates to the program and misinformation available, exactly how should you decide on a strategy?

To start, when reviewing your Social Security benefits, it’s best to do so within the context of a full financial plan. Each individual’s tax situation and spending goals, marital history, health status and retirement date varies.

Keep these key point in mind: The soonest you may apply for benefits (which varies, but is generally 62), the age you may collect “full,” unreduced benefits called “Full Retirement Age” (FRA) and the latest you may collect benefits, which is age 70 for everyone.

TAKE CHARGE OF YOUR SOCIAL SECURITY

Because the Social Security Administration is no longer regularly mailing statements, it’s best to visit the Social Security website www.ssa.gov to determine your benefits. On the site, create a login to your personal record and find your “Full Retirement Age.” This is the age any American who has worked long enough at a job where they paid into the Social Security system (at least 40 calendar quarters total) may claim the “full” benefit.

If you fall into this category and are married or divorced but previously married for more than 10 years, the recent legislative changes may apply to you.

Money is a tool, and usually we look at how it can be used to our benefit. But that tool can be used to benefit others through gifting and charitable giving. If you have a desire to share your financial success, incorporate those thoughts into your financial plans.

After you determine who gets your money, you need to decide when the giving will occur. If the gifts are to individuals, as of 2016 donors can give $14,000 to each person and the gifts do not need to be reported on tax forms or subjected to gift taxes.

If you are married, both you and your spouse each can give up to $14,000 without triggering tax on the gift. For example, together, couples can give $28,000 to an individual. Gifts above that amount are not subject to gift taxes until the couple’s accumulated lifetime gifts to all exceeds $10.68 million. However, they must be reported on the giver’s tax returns by filling out Form 709. Those gifts can be specified to be used now or for a long-term benefit such as funding a 529 College Savings Plan, a Roth IRA or a saving and investment account.

CHARITY GIVING

If the gift is to a charity, it may be tax-deductible. To deduct a charitable contribution, taxpayers must file Good Gifts Charitable Giving and Your Financial Plans By James S. Lineweaver Form 1040 and itemize deductions on Schedule A. Charitable gifts can be made now, or planned for the future. Future gifts can be specified in your will or by naming a charity as a beneficiary on a retirement account or life insurance policy.

Planned gifts are both smart and generous. If you need money for your lifetime expenses, they are available, and the remaining assets benefit your desired charity. If you don’t itemize deductions on your 1040, once you reach age 70 1/2 you can transfer up to $100,000 a year from your IRA directly to charity as a Qualified Charitable Distribution (QCD), without that distribution counting as part of your adjusted gross income.

On Aug. 1, 2016, the Ohio Department of Medicaid drastically changed eligibility rules for Medicaid benefits for people who are disabled and others who need long-term care.

My column in the September/ October 2016 issue of this magazine highlighted three significant changes in these new rules: How Medicaid deals with the applicant’s home, how Medicaid treats retirement funds that belong to an applicant’s spouse, and the applicability of a rule (new in Ohio) that bars Medicaid coverage for people who have too much income.

SO, WHAT DOES “TOO MUCH INCOME” MEAN?

As I wrote in the last issue, “too much income” sounds weird. But because Medicaid provides money for medical coverage for the poor, having “too much income” can make someone ineligible for help.

Those whose gross income is higher than $2,199 per month are ineligible for Medicaid coverage for long-term care. (That amount is adjusted from time to time to compensate for inflation.) That $2,199 is not enough to pay for long-term care for most people; it would cover a few hours of home care each week.

Because the amount of income that blocks eligibility is not enough to keep up with the costs of long-term care, a method has been created to make it so that only part of a Medicaid recipient’s income actually counts as income. As an aside, don’t look for logic here. This stuff is crazy. It’s what satisfies the rules, though. The only explanation I can offer for this “too much income” thing is that these are the rules.

To make some income not count as income for Medicaid purposes, recipients can run some of their income each month through a Qualified Income Trust, commonly referred to as a Miller Trust.

“Qualified Income” is not counted as income for Medicaid eligibility purposes, and the monthly money that goes through the Qualified Income Trust is “Qualified Income.”

Some call Baby Boomers — those between 52 and 70 this year — the Sandwich Generation because many are caring for both parents and children.

Similarly, many in this age group are sandwiched between inheriting assets or family businesses, and planning for future distributions of their own assets or transferring the family business.

An estimated 90 percent of inheritance is depleted by the third generation, and only 12 percent of family businesses survive from the second to the third generation, research shows. It is hard to know exactly how to prevent this, but many believe that communicating with and educating family members is key.

TELL YOUR STORY

Preserving wealth and family business is only part of the picture. Now is the time you can add to the picture of your life, change the story and make yourself understood. Simply put, people in this age group have reached a stage in their lives when finding meaning in life has become a priority.

You want your adult children and grandchildren to understand what you value most and why — how you have tried to make a difference and where. You also want them to be financially literate and prepared to inherit. You want your children to know why you give to your favorite charities, and you may hope that they carry on those choices.

Financial and legal advisers who work with adults in this situation may not feel comfortable starting the “soft” conversations around money and values. It is up to you to ask these professionals if they will work with your family to articulate the values that accompany the inheriting and passing on of valuables. Much more than assets are about to be transferred; ideals are being passed on to the next generation as well.

You can start the conversation yourself. Do you know the charitable organizations that mean the most to the people closest to you?

A change in tax rules that went into effect in 2015 created potential problems for investors who roll money from one IRA into a new IRA. Now, with a new ruling, the IRS is offering relief for some who inadvertently violate the rules.

Prior to 2015, if you owned more than one IRA, you could roll over each one once a year. As long as you completed the rollover within 60 days of the payout, there was no tax. After the 2015 U.S. Tax Court opinion, such IRA rollovers could be very costly. The new rules allow only one rollover in any 12-month period.

You can avoid trouble by using direct IRA-to-IRA transfers. With a transfer, the IRA custodian sends the money directly to the new IRA custodian. There are no tax consequences and you are not required to report anything on your income tax return. An individual is permitted to make as many transfers a year as they would like.

A rollover may appear similar to a transfer but it is a very different operation. With a rollover, if the distributed assets are not contributed back into a qualified retirement account within 60 days, the distribution is considered a withdrawal and becomes taxable. Additionally, if you are under age 59 1⁄2, an extra 10 percent penalty for an early withdrawal may apply.

With the one rollover per year rule, all additional rollovers are treated as distributions, and the full amount is included on your tax return.

Realizing there could be circumstances where meeting the 60-day rollover rule could be difficult, the IRS in Revenue Procedure 2016-47, which went into effect Aug. 24, 2016, will grant a waiver. Taxpayers can self-certify that due to certain circumstances — such as a death or serious illness in the family, an error by the financial institution, severe damage to your residence, incarceration or a postal error — the time limit was not met, and avoid the penalties associated with the 60-day rollover rule.

Millions of people have powers of attorney. However, are you opening yourself up to problems in this common estate planning document? Attorney Michael Solomon explains this document and how you can make it work for you.

WHAT’S A POWER OF ATTORNEY?

A power of attorney is a simple legal document that authorizes someone you name, typically a trusted family member, to handle your legal or financial affairs. With this document your agent, the person you give it to, can step in to help when you become incapacitated.

CAN YOU NAME THE TWO MOST IMPORTANT LEGAL DOCUMENTS YOU ABSOLUTELY MUST HAVE?

I’ll give you a hint: a will and a trust are the wrong answers. The two most important legal documents are a financial durable power of attorney and a health care durable power of attorney. Wills and trusts are certainly important. Those are documents to plan for your estate at your death. The durable powers of attorney for finances and health care are designated to protect you during your lifetime.

The first document, the financial durable power of attorney, authorizes someone you trust, usually a spouse or child, to handle your finances. The agent you name can pay your bills, sign checks, sell stocks and generally handle your finances. If you become incapacitated or unable to handle your financial affairs, your agent under the financial durable power of attorney can easily step in to handle things.

The other document is the health care durable power of attorney. With this document, you can authorize someone to make healthcare decisions for you if you can’t make your own.

WHAT ARE THE DANGERS?

When you give someone a power of attorney, you’re giving them the power to go to the bank and take your money, or to sell the house. That’s a lot of power, and it can also lead to problems.