October 2014

CURRENT ISSUES IN THE AREAS OF ESTATE, TAX

AND PERSONAL AND BUSINESS PLANNING

The information that follows summarizes some of the current issues in the areas of estate, tax and personal and business planning which may be of interest to you. Although this information is accurate and authoritative, it is general in nature and not intended to constitute specific professional advice. For professional advice or more specific information, please contact my office.

HUD Changes Reverse Mortgage Program. Effective September 30, 2013, HUD imposed changes to the home equity conversion mortgage (HECM) program. The “standard” and “saver” options have been replaced with a program which lowers the amount of funds that can be withdrawn in a lump sum. Mortgage insurance premiums (MIPs) have been increased. The changes stem from the fact that HUD’s MIP Fund has been projected to be in the negative by billions of dollars due to high defaults. Many defaults stem from the fact that numerous needs-based borrowers were receiving the maximum amount of funds and not budgeting for ongoing expenses such as taxes, insurance, etc. The reverse mortgage program has been a lucrative boon to mortgage issuers. It has also been a costly exercise on the part of the federal government. The significant increase in the “hawking” going on over the television airwaves by various celebrities should be clear evidence of the profits that are available to the reverse mortgage issuers. Reverse mortgages are often not such a good deal to the borrower. In many cases, there are financial alternatives to a reverse mortgage. It should be noted that the advertising never suggests that legal or financial advisors should be consulted, when in the case of television advertising for something as mundane as aspirin, there is always a suggestion that a person’s physician should be consulted. If the truth behind reverse mortgage products was made known, many borrowers will decide that it is not in their best interest. Other alternatives will often be more financially advantageous. In cases when family members have funds available for that purpose, a private reverse mortgage arrangement can be implemented for less money and with greater financial flexibility. Before incurring closing costs which could be as high as $8,000 or more for a $100,000 reverse mortgage, potential borrowers would be wise to seek legal and financial advice to evaluate other possible alternatives.

Life Insurance For Payment Of Funeral Expenses. A recent Indiana Court of Appeals decision, State Board of Funeral and Cemetery Service v. Settlers Life Insurance Company, 2014 Ind.App. Lexis 105 (Ind. App. 2014) illustrates the importance of implementing appropriate funeral prepayment arrangements when an application for Medicaid may be filed in the future. In this case, Settlers sold a policy which would operate in one of two ways: on the one hand, it was a conventional policy which would pay $10,000 to a named beneficiary; however, on the other hand, it could be assigned to an optional trust established by National Guardian Life (NGL) Insurance Company (a parent company of Settlers), in which event the proceeds could only be used to pay for funeral expenses. The Pulaski County Division of Family Resources determined that the policy disqualified the purchaser for Medicaid. To alleviate that problem, even though the policy had already been assigned to the NGL trust and supposedly could not be further assigned, Settlers allowed the policy to be assigned to the funeral home, thus avoiding the Medicaid problem. At that point, the issue ceased to be one concerning Medicaid, and instead the question was whether the policy violated Indiana’s Pre-Need Act which governs prepayment for funeral services and merchandise. Ultimately the Court of Appeals determined that the policy did not violate the Pre-Need Act which governs prepayment for at-need services. In the case of the Settlers policy, the policy would be used after death to pay for at need services. However, the purchase of the policy created a significant Medicaid problem, which can be very expensive for individuals who are seeking to obtain Medicaid eligibility. With nursing home costs running as much as $7,000 per month or more, losing even one month of Medicaid eligibility can cost a potential Medicaid beneficiary as much as $7,000 per month, and if the problem continues for several months, the financial drain can become disastrous. It is always my advice that people who are considering alternative funeral arrangements talk to reputable funeral homes to evaluate their options, and they should also seek legal and financial input to make an appropriate decision. There is nothing wrong with prepaying and prearranging one’s funeral, and in fact, in many instances, doing so is an excellent financial move. Most funeral homes, particularly in the Evansville metropolitan area, are very reputable and will work diligently to implement appropriate arrangements for the families with which they work. However, there may be alternatives available that might not otherwise be considered. For example, an existing life insurance policy can be rendered exempt for the purpose of determining Medicaid eligibility, depending on the death benefit of the policy, simply by designating the funeral home as a beneficiary, or the policy could be assigned to the funeral home, which might also make sense in certain instances. Consumers would be well-advised to obtain appropriate legal and financial input before making what for them may be significant financial and legal decisions.

Maximizing The Value Of Your Roth IRA. In recent months I have worked with several clients who have Roth IRAs. A Roth IRA differs from a Traditional IRA in that the contribution to the Roth IRA was not tax deductible (or if a Traditional IRA was converted to a Roth IRA, the funds in the Traditional IRA were rendered taxable). As with a Traditional IRA, the earnings and growth inside the IRA will be accumulated free of income taxes. The Roth IRA funds, however, unlike a Traditional IRA, can be paid out without being subject to income taxes. Consequently, in the case of a Traditional IRA, the funds in the IRA will always be subject to tax at some point. In the case of a Roth IRA, however, the proceeds inside the IRA will not be taxed if the account is handled properly. In order to maximize the value of the Roth IRA, the Roth status should be preserved and the tax-free accumulation process continued for as long as practicable in the circumstances. It would be possible for a taxpayer to die and for the account to be rolled over to the spouse, and then retained by the spouse with no funds being withdrawn, and ultimately for the funds to be paid out to the children and/or grandchildren. The more time that elapses before pay-out begins, and the longer the period of the pay-out, then the greater the benefit will be from the Roth IRA. If there is a likely need to use the funds in the future, a Roth IRA may not make financial sense. It may be better to obtain the tax deduction for contributions to the Traditional IRA, and then ultimately to have the Traditional IRA proceeds paid out later and be subject to income tax when they are needed, when the taxpayer may be in lower tax bracket, or when the funds may be offset by the federal income tax itemized deduction for Medical expenses. There are no clear and easy answers for IRAs, which are actually more complex products than most people recognize.