Planning for Retirement? – IRA Limits and Catch-Up Contributions

Bay Area Tax Lawyers – For those who annually contribute to their IRA account and wish they could contribute more, there is good news. The annual contribution limit is inflation adjusted each year and is slowly increasing.

Taxpayers 50 and older are allowed larger contributions through so-called “make-up” provisions (see table below).

The contribution limit for Traditional IRA Accounts for taxpayers that do not have a qualified plan with their employer is as follows.

IRA Contribution Limits

Year
2008-2012
2013
2014
Under Age 50
5,000
5,500
Inflation Adjusted
Age 50 & Over
6,000
6,500
Inflation Adjusted

However, if a taxpayer is an active participant in an employer’s pension plan or a self-employed pension plan, the deductible amount will be ratably phased out if their income for the year (AGI) is within the phase out range and not allowed at all if the AGI exceeds the phase out range (see the table below). The phase-out ranges are adjusted annually for inflation.

Phase-Out Ranges

Filing Status
2012
2013
Single & Head of Household
58,000 – 68,000
59,000 – 69,000
Married Filing Jointly
92,000 – 112,000
95,000 – 115,000
Married Filing Separately
0 – 10,000
0 – 10,000

 

Special rule for a nonactive participant spouse – The limits for deductible IRA contributions do not apply to the spouse of an active participant. Rather, the maximum deductible IRA contribution for an individual who is not an active participant but whose spouse is an active participant, is phased out for the non-active participant if their combined AGI is between the inflation adjusted limits for the year as illustrated in the table below.

Nonactive Spouse Phase-Out Ranges

Year
2012
2013
Phase-Out Range
173,000 – 173,000
178,000 – 188,000

Long-Term Medical Care Services

Ainer & Fraker – Amounts paid for long-term care services and certain premiums paid on long-term care insurance are deductible as medical expenses on Schedule A.

Costs of care provided by a relative who is not a licensed professional or by a related corporation or partnership don’t qualify. The maximum amount of long-term care insurance premiums treated as medical depends on the insured’s age and is inflation-indexed annually. The following are the deductible amounts for the past few years. If the taxpayer paid long-term care premiums and qualifies for a medical deduction on Schedule A of their tax return and did not include them in their medical deduction, the return can be amended to include the deduction. Please call this office to see if the deduction will make a difference and to have us prepare the amended returns.

Deduction Limitations
Age
2011
2012
2013
2014
40 or less
340
350
360
*
41 to 50
640
660
680
*
51 to 60
1,270
1,310
1,360
*
61 to 70
3,390
3,500
3,640
*
71 & older
4,250
4,370
4,550
*
Per Diem
300
310
320
*

 

Employees generally won’t be taxed on the value of coverage under employer-provided long-term care plans. However, the exclusion doesn’t apply if coverage is provided through a cafeteria plan. In addition, long-term care services can’t be reimbursed tax-free under a flexible spending account.

The “Long-term care contract” is an insurance contract that provides only coverage of long-term care and meets certain other requirements. Some long-term care riders to life insurance will also qualify. Benefits under a long-term care policy (other than dividends or premium refunds) are generally tax-free. For per-diem contracts that pay a flat-rate benefit without regard to actual long-term care expenses incurred, the inflation adjusted exclusion is limited to $320 a day in 2013 (up from $310 in 2012), except when long-term care costs incurred are more than the flat rate and are not otherwise compensated by some other means.

A contract isn’t treated as a qualified long-term care contract unless the determination of being chronically ill takes into account at least five activities of daily living: eating, toileting, transferring, bathing, dressing and continence.

“Long-term care services” include necessary diagnostic, preventive, therapeutic, curing, treating, mitigating, and rehabilitative services, maintenance or personal care services prescribed by a licensed practitioner for the chronically ill.

“Chronically ill person” is one who has been certified by a licensed healthcare practitioner within the previous 12 months as: (1) unable to perform at least two activities of daily living (eating, toileting, transferring, bathing, dressing, continence) without substantial assistance for a period of 90 days due to loss of functional capacity, (2) having a similar level of disability as determined in regulations, or (3) requiring substantial supervision to protect from threats to health and safety due to severe cognitive impairment. The requirement that a qualified long-term care insurance contract must base its determination of whether an individual is chronically ill by taking into account five activities of daily living applies only to (1) above (being unable to perform at least two activities of daily living). 

Estate Planning for Parents of Special Needs Kids

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Estate Planning is important for all families.

However, it is especially critical for families with one or more children with special needs.  Without proper planning, valuable government resources may be jeopardized, or worse, lost forever.

10 Ways To Lawsuit-Proof Your Estate #9

FORBES Magazine online blog, The Best Revenge – by Ashlea Ebeling, has an excellent article called 10 Ways to Lawsuit Proof Your Estate that covers a lot of the advice that we at Ainer & Fraker, LLP give to our clients.

Please read the entire article by clicking on the following link: 10 Ways to Lawsuit-Proof Your Estate.

Today, we’ll examine Part 9 – Include a “no contest” clause

“No contest clauses, also known as “in terrorem” clauses are generally valid and are an effective tool in preventing estate fights, especially if there is intrigue to start. A typical clause says that if any beneficiary of the will contests the validity of the will or any provision of the will, he of she forfeits his interest. You must leave something of value to the folks you expect to stir up trouble to make it work.”

~ Ashlea Ebeling, 10 Ways to Lawsuit Proof Your Estate

Ainer & Fraker, LLP Analysis

No Contest Clauses can be very effective in deterring an estate fight, but they must be used with caution.

In some cases, they can be used to cut both ways – helping someone take money from an estate improperly.

In one estate we are familiar with, a distant relative of Mom & Dad convinced Mom & Dad to leave 80% of the estate to them, instead of to son.  Son and Grandchildren were left only 20% of the Estate.

Son believed that this was a result of undue influence, but risked triggering the No Contest Clause if he did not prevail.

Due to recent changes in the No Contest Clause law in California, the bar to successfully challenge based on undue influence (or other direct contests) has been raised.

California’s No Contest Clause, found in Probate Code Section 21310-21315, makes it very difficult to file a direct contest without “probable cause.

Typical of the Legislature, no precise definition of Probable Cause is provided in the Probate Code.

Absent clear guidance from the Courts, it remains difficult to determine which challenges will be found to trigger a No Contest Clause, and which will not.

Competent legal counsel should always be consulted before considering the use of No Contest Clauses in Estate Planning.

Assets Not Subject to Probate

In our earlier post series, we discussed why Avoiding Probate is important for your family.

We discussed the Top 5 Reasons to Avoid Probate in California:

  1. The extremely High Cost of Probate
  2. The public nature of the proceedings
  3. The length of time involved in Probating an Estate
  4. The bureaucratic, Court-driven nature of the Probate process
  5. The requirement for Minor Children to be put on a Family Allowance

However, it is important to know which Assets are not ordinarily Subject to Probate.

First, under California Law, there is a provision for handling smaller estates known as the California Small Estate Affidavit procedure.  Assets are not subject to Probate if they qualify for this procedure.

Next, there are certain assets that pass By Operation of Contract – such as IRA’s, 401(k)’s, life insurance, etc. – generally are not subject to Probate.

Finally, Joint Tenancy assets are not subject to Probate, except in certain circumstances.

We will address each of these in separate posts, which you can access by clicking on a link above.

As always, we look forward to serving your family’s Estate Planning needs.

Contact Our Firm to see how we may help you.

Avoiding Probate #5 – Children or Creditors?

Part Five in our series, Reasons to Avoid Probate, deals with the harsh impact that the Probate process has on families with Minor Children.

In each of the first four parts of this series, we dealt with issues that affect all Estates that go through Probate – the High Cost of Probate, the Public Nature of the Probate Process, the Time Consuming nature of Probate, the Bureaucratic Nightmare of Probate.

However, now we will focus on how the Probate process affects Families with Minor Children.

From a practical perspective, once the Parents of a minor child die, the vast majority of all bank accounts, financial accounts and other sources of revenue shut off completely.

Unless these accounts are set up in Joint Tenancy – or there is some other reason a bank or financial institution will keep it open – most accounts terminate when the account holder dies.

In real terms, the person who has been nominated as Guardian for the Minor Children will experience difficulty and delay in accessing the parent’s money for the care and support of the children.

Usually, banks or financial institutions will want to see Letters Testamentary before they allow a Guardian to access the money.

However, Letters don’t issue immediately upon the death of the parents, rather they issue only on the opening of the Estate.

If there is a delay in opening the Estate – for instance if there is a challenge as to who should serve as Personal Representative – it can delay the availability of money for the minor children.

Now, the Probate process has created a procedure for allowing money to be distributed to the Guardian of the Minor Children during the Probate process.

This is called the Family Allowance, and may be available to the Guardian upon petitioning the Probate Court.  The Family Allowance is based upon the needs of the Minor Children, but it is doled out as a monthly stipend.

What this means for Families is that, in the Probate process, the Guardian will almost never have immediate and unrestricted access to all of the Parents funds for the care and support of their children.

Clients often ask us:  Why is the Probate process so difficult on families?

The answer is simple:  Probate is not primarily designed to serve the needs of the Decedent’s children, but rather the needs of their Creditors.

However, we have yet to meet a Parent who puts the needs of their Creditors ahead of the needs of their Children.

And yet, in many cases, this is exactly what the Probate process does.

Reason enough to Avoid Probate.

Avoiding Probate #4 – The Bureaucratic Nightmare

Part Four in our series, Reasons to Avoid Probate, deals with avoiding the Bureaucratic Nature of the Probate Process.

In Part Three, we examined the very slow nature of the Probate process.

Now, we will look at some of the reasons why the process is so cumbersome and slow.

At it’s heart, Probate is a Court-supervised (some would say Judge-controlled) process.

Unlike the informal nature of the Trust Administration process, virtually nothing happens in Probate without the Probate Court’s approval.

There are a host of bureaucratic requirements and opportunities for postponement and delay.

Let’s examine a few common causes of delay:

  • The Personal Representative does not qualify to serve, or is not able to be bonded (if required)
  • The formal Accounting provided to the Court is challenged or contested by one or more  beneficiaries or interested parties
  • There are insufficient or illiquid funds that prevent the timely satisfaction of creditor claims
  • Real property in the Estate is subject to Foreclosure proceedings
  • More than one person files to serve as Personal Representative if none is named in the decedent’s Will
  • Required deadlines and procedures for providing Notice to interested Parties are missed or not followed to the letter

To be sure, these issues can arise in the Trust Administration process as well.

However, due to the informal, Trustee supervised process of Trust Administration, these issues can usually be handled swiftly and with a minimum of hassle.

Not so when dealing with the bureaucratic nature of the Probate Process.

Reason enough to Avoid Probate.

Avoiding Probate #2 – Privacy Matters

The second part in our series, Reasons to Avoid Probate, deals with the very Public nature of Probate Court proceedings, and why the lack of Privacy can cause harm to your family.

Unlike with a Living Trust, which must only be shared with those named in it after the creator has died, the Probate process is an open, public forum.

All of your bank account numbers and locations, birth dates, social security numbers and other Personally Identifiable Information become a matter of Public Record, which almost anyone can access.

In short, it becomes a one-stop-shop for would-be identity thieves.

Two or three decades ago – before Identity Theft became a household word – the Public Nature of the Probate Process was not ideal, but it didn’t represent the risk it does today.

Today, many Probate Courts in California allow much of the information from a Probate proceeding to be published online.

No longer do you have to go down to the Probate Records department and furnish identification.

Now you can stay at home and access a treasure trove of Personally Identifiable Information over the internet.

Reason enough to Avoid Probate entirely.