Retirement Isn't For Everyone - Just Ask These Lawyers!

Retirement isn’t for everyone. If health holds out, some people want to keep working.

Just ask Attorney Martin Katz, whose remarkable career was covered in a recent Associated Press article. At the age of 99, Katz works as a special public defender for the State of Connecticut, as well as serving as magistrate for small claims cases and providing free legal services for veterans. He graduated from the University of Connecticut Law School in 1951 after seeing action in North Africa and Europe during World War II.

Omar Williams, Superior Court Judge, says of Katz: “Obviously, it’s amazing that there is someone who is 99 years old who is still working in this field. But to be putting out that type of work product, to be every bit a persuasive advocate — it’s absolutely incredible.”

Katz says he loves his work and has no intention of giving it up. He doesn’t know what he’d do with his time if he wasn’t working. When asked when he plans to retire, he quips, “When they carry me out of here.”

But Katz is practically a baby compared to Mordie Rochlin, age 106. Rochlin is a New York tax and estates lawyer who started at the Paul Weiss firm in 1938. Although he can no longer put in full days and must use a wheelchair, he is still of counsel to the firm. He goes to the office and spends about an hour and a half there, reading memos and making phone calls. He tells the New York Law Journal: “Paul Weiss was my life. The way I looked on the firm, it was not only a community of scholars but a community of friends.”

The current chairman of the firm, a summer associate when Rochlin gave up full-time work, says. “Mordie is a treasure.”

Beneficiary Designations: So Much Can Go So Wrong If They're Not Right

I was contacted some months ago by  "Patricia." She had read my Palm Beach Post article about 401K beneficiaries and it immediately reminded her of a situation that had occurred in her own family.  She suggested my readers would benefit from hearing her story, and I agreed. Here it is:


Patricia's brother "Al" was married and lived in Florida. The couple's only child, "Jennifer," was an infant when Al and his wife divorced. Just months after the divorce, Al's ex-wife remarried. She took Jennifer and moved to Oregon with her new husband. Al remained in Florida. With the distance, the cost of travel and the heavy demands of Al's job, he and his daughter had virtually no contact as she grew up. (This all unfolded before the era of telecommunications; there was no internet , no Skype, no smart phones, etc.) 


When Jennifer was 10, Al's ex-wife called him to say her husband wanted to adopt Jennifer, and Jennifer wanted that, too. Would Al consider giving up his parental rights? Al's immediate response was no. But after some soul-searching, he concluded that for all intents and purposes, Jennifer considered her stepfather to be her real father. Believing he was making the unselfish choice, Al reluctantly agreed to give up his parental rights. Jennifer was adopted by her stepfather.


Al never remarried. He died several years ago without a will (intestate), leaving behind just one asset: a 401k worth about $600,000. It had no beneficiary designation. Jennifer was in her early 40s at the time of his death.


The personal representative named to handle Al's  estate contacted the administrator of Al's 401k plan. The 401k administrator asked the personal representative if the decedent had any children, and the personal representative replied yes, the decedent had one "adopted" daughter. The administrator interpreted this to mean that Al had adopted a daughter - not given one up for adoption.


Under Florida intestacy law, it therefore was Al's sister Patricia - then Al's only living relative - who should have inherited the 401k. Jennifer was not Al's rightful legal heir. But because of the miscommunication between the personal representative and the plan administrator, the 401k funds were released to Jennifer. 


Patricia called Jennifer to talk over the situation. Jennifer would not consider giving Patricia any of the money, saying it was "obvious" that her biological father wanted her to have it. Patricia subsequently contacted an estate litigation attorney to pursue the matter, but abandoned the effort after learning that her case was by no means a sure thing, and that the legal fees would be very steep.


Of course, it is altogether possible that Al wanted his biological child to get his 401k. On the other hand, he never took any action to make that happen, so no one will ever know what he truly had in mind.


Notwithstanding the unusual nature of this family's experience, it underscores the importance of getting your beneficiary designations right, and keeping them updated as the years go by. This is why our lawyers request that our estate planning clients inform us about all their assets and beneficiary designations in detail. It's not that we're nosy. We are on your side and want to make sure your hard-earned assets end up with whom you want!

MyRA retirement savings program now terminated

The Obama Administration introduced the myRA program in 2014. Designed to help low- to middle-income earners with no workplace retirement plans begin saving for retirement, the myRA program was open to married couples and individuals with adjusted gross incomes up to $191,000 and $129,000, respectively. The no-fee accounts were a type of Roth IRA that could be opened with as little as $25, and were backed up by Treasury Bonds.

Now, the Trump Administration is discontinuing the program, citing insufficient participation. According to the Treasury Department, 30,000 accounts were established since 2015, with investments totaling $34 million. With total administrative costs at $10 million annually, the program is considered too costly to continue.

At this point, those with existing myRA accounts can close their accounts, paying income taxes on any earnings. Or, they can roll over their accounts into a traditional Roth IRA. The Treasury Department has instructions on how to proceed. Click here for more information.

Trump executive order creates more uncertainty for retirement advisor fiduciary rule

As I explained in my June 2016 post, a Department of Labor policy, originally set to go into effect April 1, requires brokers giving advice on retirement accounts to put their clients' best interests above their own. For example, given a choice between two retirement investments of equal benefit to a client, under the new rule an advisor would have to steer the client into the investment with the lesser fees or smaller commissions, even though that is not advantageous to the broker.

Many in the financial services industry have been fighting the rule since it was introduced, claiming it cuts into profits, is a particular threat to small investment advisors and independent investment advisors, and will ultimately lead to less options for the public. The rule has been challenged in court. The most recent lawsuit, brought in the U.S. District Court for the Northern District of Texas, was filed against the Department of Labor by the Insured Retirement Institute, the Financial Markets Association, the Financial Services Roundtable, and the U.S. Chamber of Commerce. Although the Department of Labor prevailed, the new rule is still on shaky ground. Not only are more lawsuits in the works, but on Feb. 3 the Trump Administration issued an executive order requiring the Department of Labor to review the fiduciary rule and assess if it should be kept, modified or scrapped. The Department of Labor says it is now weighing its legal options to delay implementation. 

The President's action has evoked both criticism and praise from predictable quarters. A spokesperson for the Consumer Federation of America notes: "The only reason to repeal the rule at this point is to give a multi-billion dollar handout to the industry paid for by working Americans and retirees. This is the exact opposite of what President Trump promised to do when he was on the campaign trail." But on Capitol Hill, House Speaker Paul Ryan has said that "President Trump's action to delay the Obama Administration's fiduciary rule for further study is a wise one." 

All we know for sure is that the fiduciary rule will not go into effect on April 1 as originally anticipated. I'll report additional developments as they arise. Stay alert and keep asking questions when you seek investment advice for your 401K, IRA or other retirement account!

What can clients expect following the 2016 election?

The most contentious election in recent memory is over. Whatever your opinion of the results (and I'd venture to say you probably have a very strong opinion), my job is to analyze the impact of the election on the issues that concern my clients, and to recommend steps they may take.

Specific predictions are impossible, of course. However, we can make some educated guesses about what a Trump presidency would look like based on (1) what was said on the campaign trail; and (2) the GOP platform, since it now controls both houses of Congress. Here are some possible scenarios that could impact clients:


Changes to Florida Medicaid Benefits for Long-Term Care?

During the campaign, Trump did not mention the growing long-term care crisis that is bringing more and more middle class families to financial ruin. Clients who do not have long-term care insurance to cover nursing home expenses often turn to Florida Medicaid long-term care benefits, and, with our help, can preserve a significant portion of their assets without going broke. 

Currently, the Centers for Medicare and Medicaid Services set the basic ground rules for Medicaid, with the states having some leeway to fine-tune the rules. Republicans have long advocated replacing this system with "block grants," whereby each state would get a chunk of money, most likely a smaller chunk than they receive now. Each state would then have the freedom to formulate its own eligibility standards and other rules. If this occurs, the potential negative implications for clients could be profound. For example, as a cost-cutting measure, Florida or any state could extend the look-back period beyond the current five years, and/or well spouses of nursing home residents could lose their current financial protections.

Recommendation: 

If you believe you have inadequate protection from long-term care costs, take action without delay.

• Look into long-term care insurance. Many types of policies are now available, other than traditional policies. Read my prior post on these new types of hybrid policies. Call our office and we can put you in touch with someone who can help you select a policy. 
• In the alternative, start doing Medicaid planning, taking the steps necessary to protect your assets. Call my office for assistance.

Medicare to be Reconfigured?

Currently, 57 million seniors receive Medicare benefits. In the months leading up to the election, Trump said little about the program. However, his website now mentions "modernizing" Medicare, with the help of Congress. We do not know what "modernizing" means, but we do know that House Speaker Paul Ryan has long supported dismantling Medicare's current configuration and replacing it with a voucher system. Under that system, seniors would get a subsidy to be used to purchase private health insurance. The new system would apply only to future beneficiaries, not to those already receiving benefits. 

The GOP has also expressed a desire to increase the age of eligibility from 65, to 66 or 67. Rep. Tom Price (R-GA), House Budget Committee chair, recently told reporters that the GOP will likely begin pushing for major cuts to Medicare within the coming months. 

Some experts also expect dismantling of other programs benefiting seniors that were put in place by the Great Society program and by the New Deal. We'll have to wait and see.




Scrap the New Fiduciary Rule for Retirement Accounts?

As I reported in a prior post, beginning in April 2017 a new Department of Labor rule requires those providing financial advice on tax-advantaged retirement accounts such as IRA's and 401k's to adhere to a "fiduciary" standard. Under that standard, the advisor's recommendations must be based solely on the client's best interest. If a more expensive or riskier investment is suggested, the advisor must explain the reasons for the recommendation. This differs from the current rule, whereby an advisor is legally obligated only to steer clients into "suitable" investments - even when the suitable investment is more advantageous for the advisor than for the person being advised. It is precisely such conflicts of interest that the new rule was designed to eliminate. 

The new rule was applauded by consumer advocates, and generally opposed by the financial industry. Trump has made no specific mention of it, but CNBC in October 2016 reported that a key Trump advisor said that the President-elect will likely push for its repeal.

Recommendation:

• If you are receiving advice on your retirement accounts from a broker-dealer, be sure to ask the rationale for any recommendations. Ask if there are other options available that may be better. Do not make hasty decisions.

• Whether or not the fiduciary rule stands, note that a Registered Investment Advisor, unlike a broker-dealer, is legally obligated as a fiduciary and must act in accordance with your best interest. If you would like to consult with one of Karp Financial Services' Registered Investment Advisors, please call 561-626-1130. 

Estate Tax to be Eliminated?

The estate tax put $18 billion in federal coffers in 2015, but affected only about 5,000 estates, according to the Tax Policy Center. Beginning January 1, 2017, an individual may pass $5.49 million tax-free (up from $5.45 million in 2016); a married couple can double that amount. The excess is taxed at 40%. Obviously, only the very wealthiest Americans are impacted by the estate tax. Proponents of the estate tax point to its role in mitigating the accumulation of dynastic wealth. Critics view it as an inherently unfair form of double taxation. Trump falls into the latter group and has specifically called for its elimination.

He has also proposed eliminating the step-up in basis for inherited assets over $10M. If this comes to pass, assets over this amount will be subject to capital gains tax of 20%, based on what the decedent paid for the asset, not on the day-of-death value which is the current rule. It is unclear whether the tax would be levied when the asset is inherited, or only when it is sold. Paul Ryan, however, has said he is in favor of retaining the step-up.

Income Tax Brackets Changing?

Under the President-elect's income tax plan, the current seven income tax brackets would be reduced to three, as follows: 

• For married couples filing jointly with taxable income of up to $75,000; and for single filers with taxable income up to $37,500: 12% marginal tax rate. 

• For married couples filing jointly with taxable income from $75,000 to $225,000; and for single filers with taxable income from $37,500 to $112,500:  25% marginal tax rate. 

• For married couples filing jointly with taxable income of $225,000 or greater; and for single filers with taxable income of $112,500 or above: 33% marginal tax rate.

Contrary to popular belief, not all middle class taxpayers are expected to benefit from Trump's proposed tax plan. The non-partisan Tax Policy Center estimates that nearly 8 million middle class families would pay higher taxes under his proposals, a view shared by the conservative Tax Foundation and American Enterprise Institute.

Additionally, it is unclear as to what tax deductions would be retained or scrapped. 

Recommendation:

At this juncture, there is little actionable information to go on. Stay alert to developments, so that you can take advantage of any possible tax benefits and avoid pitfalls. Consider using a financial advisor to help you stay current, and who can inform you of any benefits and complications of particular investments.  

We will keep our eye on all these issues and report any new developments to you. Keep up with the news by checking this blog, our website, and our Facebook page. You may also subscribe to our monthly e-newsletter here. 

IRS relaxes rule for late retirement plan rollovers

Taxpayers rolling over a distribution from an IRA or other retirement account into another account must complete the rollover within 60 days of taking the distribution, or face paying income tax on those funds. In the past, if you failed to meet the deadline, the only recourse was to apply for a Private Letter Ruling from the Internal Revenue Service. That involved quite a bit of paperwork, a filing fee, and typically, a slow turnaround. Now, the IRS is cutting tardy taxpayers a bit more slack.

Under a new rule, the IRS will permit some people with tardy rollovers to avoid the Private Letter Ruling procedure and, instead, "self-certify." Essentially, self-certification entails requesting a waiver directly from the administrator of the recipient plan. The self-certification procedure is available only to those taxpayers whose rollovers are delayed because of one or more of these mitigating circumstances: 

• The distribution was paid by check, and the check was misplaced or lost and never cashed.
• An error was made by the financial institution making the distribution or the financial institution accepting the deposit.
• The taxpayer rolled over the distribution into an account he/she erroneously thought was an eligible retirement plan.
• The taxpayer's main residence was significantly damaged or destroyed.
• A family member was seriously ill.
• A family member passed away.
• The delay was due to an error by the postal service or other delivery agent.
• The plan making the distribution failed to provide on a timely basis all the information the receiving plan required, despite the taxpayer's attempts to obtain the information.
•  A foreign nation restricted the transfer for various reasons.
• The taxpayer was incarcerated.

Once the mitigating reason for the delay is eliminated, the taxpayer has 30 days to deposit the funds.

If you have exceeded the 60-day rollover deadline,  meet one or more of the above criteria and wish to self-certify to obtain a waiver, use the model letter the IRS provides and submit it to your recipient plan. See it here (scroll to page 5). Read more about the new self-certification procedure here.

Downsizing and in debt? FL Supreme Court says sale proceeds protected from some creditors

Under Florida law, homestead property is protected from creditors (except for creditors secured to the property such as mortgagors, mechanic's liens, property taxes, homeowners associations, etc.). If you sell homestead property, are the sale proceeds protected from non-secured creditors? That is often the crucial issue for near-retirees and retirees who are in debt but cannot downsize to a less expensive home to save money, fearful that the sale proceeds will be vulnerable to creditors.

If this describes your situation, here is some good news  from a recent Florida Supreme Court case. In JBK Associates Inc. V. Sill Bros, the court ruled that the proceeds from the sale of homestead property are protected, just as the homestead itself is protected prior to sale, so long as these conditions are met: 

• You hold the monies from the sale separately and do not co-mingle them with any of your other funds.
• You designate that the sale proceeds are solely for the purpose of buying a new homestead.
• You purchase new homestead property within a reasonable period of time.  (Unfortunately, the court did not clearly define "reasonable.")

The ruling makes downsizing a more viable option for retirees and near-retirees with credit problems.Read the Florida Supreme Court ruling, JBK Associates Inc. v. Sill Bros. Inc., here

Higher standard for advice on tax-advantaged retirement accounts

Federal law requires a financial advisor to put the client's best interest first when providing advice on tax-advantaged retirement accounts.    

Believe it or not, that was NOT the law until just recently. But it is today.

In the past, financial advisors working with 401ks and IRAs were required only to steer clients into "suitable" investments. With that leeway, clients might sometimes be steered into "suitable" investments that were riskier and/or paid higher fees or other incentives to the advisor, rather than into less pricey, more prudent investments. According to a report from the White House Council of Economic Advisors, such conflicts of interest, "backdoor payments" and "hidden fees" have been sucking $17 billion from Americans' retirement accounts every year. (Read report here)

Now, Americans saving for retirement will get a fairer shake. Under direction from the Obama Administration, the Department of Labor has issued a new rule requiring those advising you about tax-advantaged retirement accounts to adhere to a higher standard: a fiduciary standard. As fiduciaries, advisors will now be legally obligated to put your best interest over any other considerations. The law will go into effect in April 2017. Secretary of Labor Thomas Perez characterizes the new regulation as “…a huge win for the middle class.”

Note that the new rule does not apply to standard retail accounts. And even for retirement accounts, neither commissions or riskier investments are banned, but advisors will have to explain why they are recommending a particular investment if a less expensive or less risky one is available. 

Very important: The new rule is not at all new for "Registered Investment Advisors," who have ALWAYS been governed by the fiduciary standard. Like physicians and lawyers, they must prioritize their clients' interests over all other considerations. At Karp Financial Services, we are available to assist our clients with their retirement planning or other financial issues. If you do not currently have a Financial Advisor, want to establish a relationship with one, or just get a second opinion on your investment accounts or any other financial issue, feel free to contact us at 561-626-1130.