Law News and Tips
PLANNING WITH IRAS
Vilbig © 2020
Many of us work all of our lives saving for retirement. Some begin at a young age tucking a little money away in an IRA, a 401(k), a 403(b), or a profit-sharing plan. Some put it off for some time because of day – to – day expenses, but most eventually save something, and when I meet with clients, if they don’t have some sort of a business, the two biggest assets they have is their house in the retirement savings.
But being frugal and saving for the future can create some issues. What do you do with a retirement account if you outlive the account? Many people (particularly guys) just say they’re going to live until they run out of money. Good plan if you know when you’re going to die. The problem is, we don’t know if we are going to get hit by a semi tomorrow or linger in a nursing home for years. We just don’t know, so we need to plan.
The simplest thing to do was to just name your spouse as the beneficiary and your kids as the contingent beneficiaries. If you have a 401(k), a 403(b), or a profit-sharing plan, federal law provides that if you name someone other than your spouse as the primary beneficiary, your spouse must consent to that.
The same rule doesn’t apply to IRAs. Under federal law, you don’t need your spouse’s consent. However, in a recent Missouri case, it was determined that a surviving spouse has rights in marital assets, including IRAs. So Missouri law now protects a surviving spouse’s rights in an IRA.
So assuming you’ve named your spouse as the initial beneficiary, on your death, he or she can roll the retirement account into his or her own name tax-free. If the surviving spouse is younger, that’s a good idea since using the younger spouse’s longer life expectancy means he or she can extend the tax-deferred growth of the account.
On the death of the second of you to die, if you’ve named your children as the contingent beneficiaries, then the assets can be divided among them and rolled over into what is called an “inherited IRA.” It used to be that inherited IRAs would last for the life expectancy of the beneficiary. In the recent SECURE Act, Congress limited the term of inherited IRAs to 10 years. It’s still a good idea to keep the assets in a tax-deferred account, it’s just that there’s a time limit.
But there’s another problem with inherited IRAs. In 2014, in the case of Clark v. Remeker, the US Supreme Court ruled that inherited IRAs are not protected from bankruptcy claims. What this means is that an inherited IRA is not protected from creditors. So if your son or daughter inherits an IRA from you and is later sued and doesn’t have insurance coverage on the matter, all of your hard earned money could go in payment of a judgment. To me, that’s a bad result.
In order to avoid that result, we typically recommend that clients name their spouse as the initial beneficiary of a retirement account, but named a revocable trust as the contingent beneficiary. In 1999, the IRS provided us with “magic language” that permits us to flow an inherited IRA through a trust. By having the assets run through the trust, they are protected from lawsuits.
If you have questions, let’s talk.
Fred Vilbig © 2019
A REAL ESTATE DILEMMA
Some time ago a client with a real estate dilemma called. He had a big tract of land, and now someone wanted to buy it – for a lot of money – for duck hunting. What?
The problem, though, was that his father had given it to him; and his father had given it to him; and his father had…. Well you get the idea. And if he sold it now, he was going to get hit with a million-dollar tax liability – literally. Here’s why, in fairly simple terms.
When you sell something you’ve owned for over a year, you have to pay a 20% tax on your capital gains. Your capital gain is the difference between (i) what you sell your property for and (ii) what is called your “basis.” Your basis is (a) what you paid for the asset (less any depreciation or amortization – never mind about that for now); (b) the date of death value if you inherited the property; or (c) the donor’s basis if it was a gift.
In our situation, all of my client’s ancestors had given the property to children, so his basis was the original 1905 purchase price for the land. Land was cheap back then, so he had a huge capital gain. So what to do?
In meeting with my client, I discovered that he really didn’t need the principal from the sale; he was just looking for retirement income. He didn’t have any children, so he wasn’t concerned about leaving an inheritance to anyone. He was a fairly religious person and was actively involved in his church. So I recommended a charitable remainder unitrust. A what?
A charitable remainder unitrust (a “CRUT”) is an irrevocable trust that is tax-exempt. If a CRUT sells an asset, there is no tax on the sale. With a CRUT, the donor can reserve a kind of an “income” interest over his or her lifetime or for a period of years not to exceed 20. The “income” interest is a fixed percentage of the annually recalculated fair market value of the trust principal. The percentage (called a “unitrust percentage”) must be at least 5% and is capped out based on a math formula. During the donor’s lifetime, he or she receives payments from the unitrust (which are taxable). The principal, though, continues to grow on a tax-free basis like an IRA. On the donor’s death, the principal goes to the designated charity. Pretty nifty under the right circumstances.
The CRUT was just the right vehicle for my client. He was able to transfer the land into a unitrust while retaining the “income” right for his lifetime. Yes, he was taxed on the income, but the principal grew tax-free. When he dies, his church is going to receive a significant gift. Because of that, on creating the CRUT, my client was entitled to a charitable contribution deduction. It isn’t a deduction for 100% of the value of the donated asset. Rather, it is a deduction for what is called the present value of the lifetime stream-of-income. Warning: calculating all of these things can result in headaches. You’ll want to talk to an attorney or an accountant knowledgeable in this area.
I think this was a good outcome. The client was happy. The church was happy. The only losers in this scenario were the ducks. Call if you have any questions.
Fred L. Vilbig © 2018
It’s spring – at least according to the calendar. And for a lot of people, that means it’s time to start house hunting. If you’re going to move, early summer is probably the best time since the kids will be out of school and the weather should be okay. We’ve moved in February, and that was pretty unpleasant. So what’s involved in finding a house, getting a loan, and closing the deal? I’m going to focus on the contract. I am an attorney after all.
Most people work with a realtor. Realtors help buyers meet sellers. Some people already know each other, so a realtor may not be necessary there, but they can be helpful.
Once you find a home, you need a real estate contract. There is a standard residential form that realtors and most attorneys use, and it covers most situations. If there is something unique about your deal, there are places to include that.
The contract talks about financing. If you’re paying cash or don’t need to worry about financing, you can just check a box. Most people, however, need to find financing, so you can check the other box. You need to put in some limits on the loan amount and the interest rate to protect yourself, but that should be pretty easy to figure out. You just don’t want to have to close if you don’t get the loan you need to.
There are all kinds of riders (attachments) you can add, and a realtor or a real estate lawyer can help you wade through those. They can be pretty important depending on the deal.
You’re going to want to get title insurance. What that does is it protects you against buying a problem. Maybe the seller doesn’t really own the property; maybe there are easements that will keep you from using the property the way you want; or maybe the fence or driveway is on your neighbor’s property.
That last point brings up the survey. A regular title policy includes exceptions to coverage regarding survey matters. Your bank may require a “survey,” but it probably is what we call a “drive-by survey.” The surveyor can literally drive by the property and never get out of their car. Title companies won’t delete the survey exceptions without what we call a “stake-in-the-ground” survey. So be careful.
And if you’re buying a previously owned home, you’re going to want to insist on a detailed inspection. There never perfect, but they give you your best protection.
And something else for buyers to remember: your real estate agent gets paid when the deal closes; and the more the purchase price, the more they get paid. I know they are supposed to be working for you, but there is a built-in conflict of interest. Just something to think about.
The first consultation is free. Or call him now at (314) 241-3963
Lawyers read court cases… At least most do. When we were in law school, we better read them. You don’t want a law professor calling on you in class when you’re unprepared. They can be pretty mean. I think that’s a job requirement.
Then when you get out of law school, you keep reading cases for several years. It’s kind of like being an intern studying medicine. Most attorneys don’t feel really comfortable practicing law in till they been doing it for maybe five or six years. After a while, though, lawyers get a handle on the law and start skimming relevant cases instead of reading them completely.
I have to admit that cases can be pretty boring. A lot of times there talking about rules. There are lots of rules. There are rules for jurisdiction, rules for venue, rules for what arguments can and must be made in a particular cause of action. Those rules can be really boring.
But under every case there is a story. A lot of times the story is buried under a lot of rules talk, but there is a story down there somewhere. Sometimes the story is sad; sometimes the story is funny; and sometimes it is just perplexing.
One case recently caught my eye because of the story, but also because of the rule. As you may recall from some earlier columns, we’ve had a number of situations where mom and dad have both died, and a child (usually a son) who was living at home refuses to leave.
The case in question, Kocina v. Johannes, was the opposite. Kocina owned an apartment complex. She hired Johannes’ son to maintain the complex in exchange for a furnished apartment and utilities. Tracy Johannes moved in with her son. At some point, the sun notified Kocina that he was quitting. Kocina offered to renting the apartment. He said no, and left… With his mother staying in the apartment. Kocina provided Jahangir, with notice to vacate the apartment. When she didn’t, Kocina sued for wrongful detainer.
There are two ways to evict a tenant. The first is referred to as “rent and possession”. If you don’t pay the rent, there is an expedited procedure to get you out. At trial, the only question is “Did you pay all the rent due?” If not, the judge will ask if you can pay it then and there. If you can, the case is dismissed. If you owe rent and can’t pay it that day, you’re out.
The other way to evict a tenant is through a wrongful detainer action. This is much more involved where the landlord has to prove that you breached some provision of the lease, other than rent – too loud; failure to keep the apartment clean; too many or any pets at all. Those kinds of things.
When a landlord has a tenant, to evict the tenant for wrongful detainer, the landlord has to give the tenant one month’s written notice. The month in question is tied to the rental period. If the rental period starts on the 15th of each month, then the landlord has to give notice before the 15th of one month and can’t evict the tenant until the 15th of the next month. If the landlord doesn’t give the tenant notice until the 16th, then he or she has to wait two months to evict.
In the case of Tracy Johannes, she argued that the landlord didn’t give her the full 30 day notice. It turns out that in her case, it didn’t matter. The court ruled that since Tracy Johannes was not the tenant (that was her son), the landlord didn’t have to give 30 days’ notice. Tracy Johannes was not a tenant; she was just a wrongful possessor. Written notice was required, but once notice was given, a wrongful detainer action can be commenced.
This is helpful in probate or trust matters where a brother or sister is refusing to leave the deceased parents’ home. So long as written notice is given, there’s no need to wait 30 days to commence an eviction. This is particularly helpful when the holdover is during a high utility use time of year. It is important in administering an estate for a trust to keep costs down.
Many baby boomers are finding themselves stuck between their children’s generation and that of their parents. We were recently caught in that dilemma with my in-laws. It turned out that the amount of their Social Security checks roughly equaled the premiums on their Medicare insurance. That didn’t strike me as such a good deal.
I think a lot of people are getting stuck in this conundrum. It’s a difficult place to be, and the rules governing Medicare and Medicaid are impossibly confusing. The US Supreme Court once referred to the Medicaid rules as “Byzantine construction… almost unintelligible to the uninitiated.”
Those are pretty harsh words from the Supreme Court. In my career I have done a lot of tax law. I can say that the Medicaid rules make tax law look fairly simple. However, without getting into the deep thicket of Medicaid details, I think we can break Medicaid down into two general categories.
When most people think of Medicaid, we think of the program implemented to assist financially distressed individuals to pay for their medical needs. It covers a limited number of treatments. In order to qualify, the applicant has to be financially needy in one of two ways.
The first classification of qualified applicants is those individuals who are “categorically needy.” People are “categorically needy” when they have less than $1,000 of “countable assets.” In addition, they cannot have monthly income equal to or greater than $834. Individuals who fall into this category are the people we would typically think of as Medicaid qualified.
There is, however, a second class of Medicaid beneficiaries. These individuals are referred to as “medically needy.” In Missouri (and the laws vary somewhat from state to state), “medically needy” applicants must have less than the $1,000 of countable assets. However, with regard to income, “medically needy” individuals simply must not have enough income to cover their qualified medical expenses. For instance, if the cost for a person in a nursing home is $6000 per month and they only earned $3,000 per month, Medicaid can make up the difference. That person would fall into the “medically needy” category.
In both of the classifications, there is a limitation on what are “countable assets.” Countable assets are any assets an applicant owns (or owned during the five years immediately preceding the application for Medicaid benefits where the assets were not exchanged for something of value – that is, gifts), but it excludes certain assets. For instance, a person’s house is not included in “countable assets” for qualification purposes, but the State will put a lien against the house for any Medicaid benefits paid. When the house is sold after the recipient’s death, then the State will collect any Medicaid amounts it paid out of the sales proceeds. So the exclusion of the house from countable assets is only temporary.
People for years have been trying to get around the Medicaid rules to have the government pay for their nursing home costs. When I started practicing law 35 years ago, it was pretty simple. Congress caught on, though. First, they made it illegal for grandma to transfer assets to qualify for Medicaid. If she broke the law, surely they’d put her in one of those nice prisons with good medical care. That seemed like a good option to some clients.
Congress caught on, though. So they made it a crime for family or advisors to help mom or dad plan to qualify for Medicaid. As you can imagine, this was disturbing to a lot of influential people. The concern was that it would paralyze legitimate planning for fear of violating the law. So once again, Congress caught on.
Beginning in 2006, when an individual applies for Medicaid, he or she has to add back the value of any assets transferred for less than fair market value during the immediately preceding five-year period (the “look back.”). If an asset was transferred for less than fair market value during the look back period, then the government calculates a penalty by dividing the value of the gift by a Medicaid factor. This calculation determines the number of months that the applicant will be disqualified. The disqualification basically runs from the date when the value of the applicant’s countable assets drops below the maximum permitted amount. It turns out that the disqualification can run for longer than five years. Timing an application is critical!