Making Sure the Surviving Spouse has Income

The National Association of Personal Financial Advisors was recently polled determine common surprises encountered by their clients planning for retirement. A Chicago Tribune article highlighted one of the most common responses from those advisors:  a failure to set aside significant income for a surviving spouse.

It is one thing to examine how long an individual is expected to live, subtract that from their current age, and determine how much is needed each of those years. By no means is this an exact science, but it is somewhat intuitive to roughly understand how much a single individual needs to retire. Things get more confusing, however, when spouses get thrown into the mix. As one planner interviewed for the article noted, "One thing people don't plan for is the reduction of income if a spouse or partner dies."

Think about Social Security. When two partners are alive, each may receive Social Security benefits. However, if one of the spouses dies, his or her income will disappear. Even taking into account a larger benefit for the surviving spouse, the overall family income will be lower than before. Similar problems can arise for those living off a pension. A spouse's death may cause the pension income to dry up. If not accounted for, this can thrown some seniors into a financial tailspin. One professional interviewed for the Chicago Tribune story told of a recent client whose retirement income dropped 35% following her husband's passing, but who found only a 10% decrease in expenses. This ultimately required a significant lifestyle change for the woman at the very moment when she craved stability following the loss.

Various tactics can be used to minimize the long-term consequences and provide more stability no matter what the future holds. For instance, a higher-earning spouse may choose to refrain from taking Social Security. This may earn him or her "delayed credits" up to 8% a year until the age of 70. If that spouse passes on, the surviving spouse may be able to switch to the value of the other's benefit, including delayed credits and cost-of-living adjustments. For pensions, a "joint and survivor annuity" might be appropriate, where less is paid out monthly for the peace of mind of knowing that income will continue even if the pensioner dies first.

Federal Bill to Prevent Senior Abuse Advances in Senate

Over the past two years there has been increased focus on the scourge of elder abuse of all kinds.  Yet, the awareness effort has not led to any federal legal changes to help protect seniors from things like physical neglect at home or senior financial exploitation.  That may soon change.

Minnesota Democrat Sen. Amy Klobuchar and Texas Republican Sen. John Cornyn have sponsored a bill in the U.S. Senate to help prevent these harms recently advanced out of the Senate Judiciary Committee.  The bill passed out of committee on a 15-3 vote this month and will now be sent to the full Senate for approval.

Known as the Guardian Accountability and Senior Protection Act, the measure strengthens the tools available to states to provide proper oversight of guardians and senior conservators.  This focus on oversight is critical, as a lack of third-party monitoring often allows the problem to go unnoticed.  Considering the obvious need for improvement, the measure is supported by those on both sides of the aisle.

Advancement of the bill and increased focus on senior caregiving could not come at a better time, because the senior population continues to rise each and every day.  Failure to account for the issue now means that millions might be affected in coming years.  To address the problem, the measure allows states to use existing money to improve monitoring systems and creates an electronic filing system to monitor guardians and conservatorship audits.

As Sen. Klobuchar noted during committee hearings, "I know every state has incidences of people getting ripped off millions of dollars when their loved one is supposed to be under the care of a guardian. Most guardians do amazing work, good work, but again you have a situation where you have a few that are causing a lot of harm."

Are You Spending More Time Planning Your Vacation Than Your Estate Plan?

This weekend Lake County News published an interesting story noting how many community members spend more time planning their summer vacation than their inheritance and long-term issues. Think about it: how many different contingencies are accounted for when heading away from home for a one to two week trip? Pet sitters are hired, mail is paused, email auto-responders are set-up, plants are moved inside and friends are asked to water them, doors are locked, and a spare key is left in case of emergency. We take these steps just in case, so that we can enjoy our time away with the peace of mind that everything back home can be dealt with in most situations.

In many ways estate planning involves similar forethought--understanding possible issues down the road and taking steps to account for those contingencies. Yet, vacation planning is done instinctively, while estate plans are often delayed or ignore due to either procrastination or apprehension of one's mortality.  It is easy to procrastinate on these sorts of issues without immediate compulsion. Summer vacation planning has to be done by a known date. Estate planning is not that easy, because no one knows for sure how much time they have or if they may need long-term care. The indefinite future makes it easier to procrastinate. Yet, planning is vastly more effective when conducted before emergency necessitates it. You will also get the peace of mind that comes with knowing inheritance and plans are in place.

Many also put off the planning because they assume that the planning is complex and time-consuming. Planning will be done when they finally "have time" for it. There will likely never be a time when you want to do your estate plan; instead one simply has to make time to do things that matter. But beyond that, the planning itself does not necessarily have to be as complex or time-consuming as one imagines. After all, the whole point of having professional help with these issues is to hand of the work to those who deal with these matters day in and day out. In most cases, a legal professional will explain how a trust or will can be created and how to put other documents into place, including a Power of Attorney and Health Care Proxy. Even if nothing more complex is required, having these few pieces in place can make all the difference in case something happens unexpectedly.

Documentary on Financial Elder Abuse Starring Mickey Rooney

A new documentary entitled Last Will and Embezzlement that is slated for release tackles senior financial exploitation.  The film will touch on all aspects of the problem with the ultimate goal of raising awareness of the problem to ultimately lower the incidence of mistreatment.

The centerpiece of the film is an extended interview with perhaps the most well-known advocate against elder financial abuse: Mickey Rooney.  The 91-year old film star testified before Congress last year while detailing abuse that he suffered at the hands of a family member.  His purpose in appearing in the film is to dispel the myth that this sort of exploitation occurs only to those who live alone or have few close friends and family members.  In fact the documentary tagline is: "If it can happen to Mickey Rooney, it can happen to anybody."

The filmmaker was motivated to take on the project after watching her father fall victim to abuse. She explains how her father was in a nursing home, when mysteriously, a stranger entered the facility and claimed to be his son. The senior had just lost his wife and was suffering from severe Alzheimer's at the time. The filmmaker states that her father "would have signed the Magna Carta" if it was placed in front of him at that point in his life.

The scammer used his lie about being a relative to acquire sensitive financial information and exploit the ailing senior. The man also acquired a Power of Attorney over the senior, making it incredibly difficult for the family to unravel the problem down the road. It ultimately took two years before the woman finally learned of the depth of the exploitation.  Her advice: "Set it up so you don't become a victim...know the laws against elder abuse."

Since the Supreme Court upheld the Affordable Car Act, The Elder Justice Act contained in it can be implemented.  It aims to combat financial, physical, and mental crimes and abuse committed against the elderly.  Some help may also be coming in the form of federal legislation. New York Senator Chuck Schumer, for example, is fighting for stepped up federal laws requiring more mandatory reporting of suspicions of elder mistreatment. While these new rules may help, by no means do they offer clear avenues to eliminate all mistreatment.

Planning and oversight by the family are crucial preventative steps. Obviously having elder law attorneys and other advocates in the mix is one way to ensure abusers aren't able to obtain legal documents and wreak havoc on the life of a vulnerable senior who may not fully understand the situation.  Overall, it's best to have comprehensive oversight and proper preparation before disability or cognitive vulnerability sets in.

Losing the Family Home Over a $400 Tax Bill

Senior care advocates repeatedly remind families that oversight is needed in some cases to ensure seniors do not fall victim to financial exploitation. Beyond protecting against scammers and hucksters, many seniors are facing a new financial crisis that is not rooted in illegal misconduct. When on a fixed income and struggling with confusing money issues, some seniors might face incredibly severe financial penalties for falling behind on certain bills or taxes.  CNN Money reported this week on a growing number of individuals who are losing their homes because they owe relatively small sums.  A report from the National Consumer Law Center (NCLC) detailed how some states have outdated laws that allow states to sell tax liens on delinquent properties.  This means that instead of the government having a lien on a piece of property that owed back taxes or bills for services like water and gas, private investors own the lien.  The investor then collects interests on the overdue bill or, in some cases, forecloses on the home.  Some states allow investors to charge staggeringly high interest rates, from 15% to 50%.

Seniors are particularly vulnerable to falling behind in this way, either because of challenges of being on a fixed income or confusion with the bill paying process.  The NCLC report details one case of an 81-year old woman who lost the home she lived in for 40 years because she owed $474 on a sewer bill.  The NCLC report noted that seniors with cognitive diseases, like dementia and Alzheimer's are prone to fall victim to this situation.  It is very confusing to follow the changing financial arrangements.  The seniors are usually notified of the situation in legalese that many do not understand.  As a result, they do nothing, rack up interest debt, eventually default, and often lose their home.  The report elaborated that seniors without family members or who have not visited with elder law attorneys and other professionals were more likely to be hurt by this situation.  In one case, an elderly woman who lived alone without family fell back $5,000 on taxes.  Eventually, she lost her home and lost about $150,000 in equity that she had accumulated.

Advocates are working to change laws so that interest rates are lowered and adequate warnings are provided to homeowners.  It remains unclear if those efforts will be successful, and so putting preventative measures in place now is prudent for local seniors to avoid this situation.

How Does the Affordable Care Act Affect Taxes and Estate Planning?

No legal news item last week was bigger than the U.S. Supreme Court's decision to uphold virtually the entirety of the Affordable Care Act. In a move that surprised many observers, in a 5-4 decision the Court deemed the controversial "individual mandate" portion of the measure constitutional on grounds that it constituted a tax. While the court held that the Congress could not pass the law pursuant to its power to regulate interstate commerce, it did find it a permissible use of the legislature's taxing power.

Now that the matter is reasonably settled, local residents may be wondering how the law affects their estate planning, if at all. A recent Smart Money story talked about some of these issues, explaining how certain tax matters will indeed change in the upcoming year as a result of the decision. A few select rates will change next year. For example, an extra .9% Medicare tax increase will start for various individuals making over $200,000 or $250,000. In addition, some investment income (long-term capital gains and dividends) may face a 3.8% "Medicare contribution tax." This is in addition to the rising rates if the "Bush tax cuts" expire without renewal.

Starting in 2013, a cap will be added on contributions to a healthcare "flexible spending account" (FSA) plan. Right now there is no cap, so an unlimited amount of money can be contributed to the plan which is then subtracted from taxable income. The money can be used to reimburse qualified medical expenses. Starting next year, contributions to those plans will be capped at $2,500. Similarly, itemized deductions for medical expenses will now apply only to expenses that exceed 10% of annual gross income (up from the current 7.5%).

However, it is important to keep these tax issues in perspective, because they represent just a part of the bill. The overall goal is to provide comprehensive health insurance for more Americans so that overall expenditures go down while quality of care goes up, but the long-term effect of these sweeping changes will not be fully fleshed out for years to come. While the high-profile and controversial nature of the law may suggest that many things will change for all residents once it is fully in effect, the truth may be a bit less dramatic for many local families.