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How do Alaskan trust laws benefit your Colorado estate planning?

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William Kain and the es little-known advice on tate planning experts at Kain & Burke, PC give great, why you should start planning today. Produced by the BEACON‘s Advertising Team

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October 2012

Fund a trust that’s free of gift taxes by the end of 2012 By William H. Kain, Kain & Burke, PC


any people are not aware that the calendar year 2012 is a special year for estate planning. Let me explain why. But first, here are some basics. Most people know that at death, there needs to be a plan in place to make sure that your loved ones are cared for and that your assets pass to your heirs in an orderly fashion. You want them to receive what you have spent a lifetime building. Dying without a will is not the best way to do this. It’s better to have a properly drafted last will and testament from a lawyer who specializes in estate planning. Most lawyers are not qualified for this task, and one should always choose an attorney who has sufficient training and knowledge to handle the task properly. A revocable living trust is a great way to avoid probate, provide for your heirs in an efficient and relatively inexpensive way, and also prepare for the possibility that someone would need to handle your finances either due to old age, illness, or any other reason that a person cannot handle his or her own affairs at some point in life. A revocable living trust will usually avoid the necessity of an expensive conservatorship and guardianship. Some people are also aware that a bypass trust can be used to double the estate tax exemption, thus saving potentially large amounts of estate taxes. During calendar year 2012, Congress has provided for a $5 million estate tax exemption. If the Bush tax cuts are allowed to sunset on January 1, 2013, as our current president has suggested, this $5 million estate tax exemption may be reduced signifi-

cantly, perhaps back to $1 million. So now is the time to take advantage of this planning opportunity before the end of the year. For those who have a small estate, and who are sure or believe it is highly unlikely that they would ever, as a family, amass over $1 million, it might make little difference. But with the growth of IRAs and other retirement vehicles, and the likelihood of real estate growing in value over the next 10-20 years, the chances are that somebody worth a few hundred thousand dollars now may be worth over $1 million at the time of death. One should not ignore that possibility. Therefore, especially for the larger estates, this is the year to fund what is known as an irrevocable trust. This year, and what is important to remember is that this might not work next year, a person can gift up to $5 million to an irrevocable trust free of gift taxes. A married couple can give twice that much. Here is how it would work. A married couple could contribute as much as they want to an irrevocable trust, limited to $10 million, and this would be done before December 31, 2012. Again, the reason to do this before the end of the year is in case Congress does away with or reduces the $5 million estate tax exemption effective on January 1. A gift tax return for 2012 would be filed with the IRS to claim the $10 million exemption for the married couple. Having made use of that exemption this calendar year, it is very likely that you would be grandfathered in, so that if the exemption were reduced next year, this money would be out of your taxable estate regardless of what Congress does with

This is a unique feature of Alaska law and has been approved in several letter rulings by the IRS.

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October 2012 the exemption in the future. Even if Congress does not reduce the exemption, another advantage of this plan is that future increase in value of the investments put into the irrevocable trust would be eliminated from your taxable estate at death. For example, assume that the money and other property placed into the irrevocable trust doubles or triples in value between now and later death, hopefully many years later. Since it has been removed from your estate by the gift to the irrevocable trust, the property in the trust should never be included in your taxable estate at death later. Think of what it would mean to your heirs if $10 million grew to $30 million and passed to your heirs free of estate taxes because you had the foresight to make this move now while the opportunity exists. Of course, you do not need to have the full $10 million to make this an attractive plan. That is the upper limit of what is allowed. The same reasoning applies to a smaller amount. Few lawyers, even some who specialize in estate planning, are aware that this planning opportunity exists. Even fewer estate planning lawyers are aware of the fact that a trust drafted to take advantage of Alaska law has added benefits. If a Colorado resident elects to form the irrevocable trust under Alaska law, it has the following additional benefits. First, there is no rule against perpetuities in Alaska, so that a large trust of this nature can continue for multiple generations. If the trust is set up this year, the generation-skipping tax exemption is $10 million for a married couple, allowing every generation in the future to avoid generation-skipping transfer tax. Alaska has better laws concerning spendthrift trusts, so that such a trust is protected from creditors and protected in the eventuality of a divorce, to a higher degree than a trust formed under Colorado law. What is most attractive about Alaska law is the possibility to get money back out of the trust if ever needed, and still have the trust remain out- side of the taxable estate. The Internal Revenue Code generally provides that a trust over which a person retains the power to revoke, amend, or withdraw corpus or income for personal use, will be taxable in its entirety when the person who created the trust dies, even if it was an irrevocable transfer. But under Alaska law, if the trust is properly drafted, these retained powers or, as we call them, “strings,” will not cause inclusion in the taxable estate of the creator of the trust. This is because under Alaska law, you can give a separate discretionary trustee power to sprinkle income and corpus among a group of beneficiaries, who may include all of your descendants, as well as the husband and wife who originally created the trust. This is a unique feature of Alaska law and has been approved in several letter rulings by the IRS. Think of it as an irrevocable transfer, with the ability to get it back from the discretionary trustee if you run out of other resources. As I said, most estate planning lawyers are not aware of these provisions and possibilities, and those smart people who are interested in taking advantage of both Alaska law and the 2012 tax breaks, should consult an attorney who specializes in this field. William H. Kain is an attorney with the law firm of Kain & Burke, PC. He has practiced law for 35 years in Grand Junction and holds a Juris Doctorate in law. He also holds a post-doctorate law degree, an LLM in Estate Planning and Elder Law. He has nearly completed a three-year program, a second post-doctorate law degree from New York University School of Law, and an LLM in Tax Law. Kain specializes in estate planning, trust planning and probate, as well as business law. For more information, call him at 241-2969. ■

Financial planning 3

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October 2012

Medicare Monday is time to make decisions for 2013 By Eileen Doherty, Colorado Gerontological Society


mid campaign ads, television stories and political speeches, Medicare has become a topic of conversation in this year’s election. Even though the candidates are talking about changing how Medicare operates and proposing new ways to save Medicare, not much is likely to happen in the near future. Although changes could come in the next Congress, most changes, if any, would not happen in the very near future. Medicare is here to stay, at least for 2013. But Medicare beneficiaries will experience some changes for which they should prepare. Starting this fall, hospitals will not receive any reimbursement if an individual is re-admitted for any reason within 30 days. Based on past experience, most hospitals in Colorado are already subject to penalties for their existing re-admission history. Under this new reimbursement methodology, hospitals are experimenting with many programs such as visiting nurses, home care, arranging for appointments, helping to arrange for equipment and medications, and more. If you are hospitalized, you should expect and receive more help from care navigators and others when you are discharged from the hospital. Another focus for Medicare is continuing to look at ways to pro-

mote wellness and prevent disease. Although no new prevention services are being added this year, many beneficiaries are not taking advantage of available services. For example, many diabetics are

still paying for some of their supplies out of pocket because they are not using the right company from which to purchase the supplies and medications. Lancets, glucometers, and test strips are covered by Medicare Part B, while insulin and syringes are covered by Medicare Part D. Thus, if a beneficiary buys lancets, glucometers and test strips at the local pharmacy, which does not have a Medicare Part B billing number, the result is that the beneficiary pays out of pocket for these supplies. The pharmacy, however, will usually have a billing number for Medicare Part D, so the glucose and syringes will be covered.

October 2012 Many times the beneficiary is unaware they have to use two companies to manage their diabetes. As usual, the standard benefit for prescription drugs is changing. Many stand alone prescription drug plans, as well as Medicare Advantage health plans will make changes to formularies, co-pays and deductibles. Beneficiaries are encouraged to talk with a Medicare counselor to review the current drugs to determine if the current plan is still the most cost effective or if changes need to be made. These changes need to occur between October 15 and December 7, 2012 for the change to be effective January 1, 2013. Individuals who are not new to Medicare who wish to enroll in a Medicare Advantage health plan must do so between October 15 and December 7, 2012 for coverage to begin January 1, 2013. Individuals wishing to enroll in or change Medicare Supplement plans may do so at any time during the year, however, they may be subject to underwriting criteria if they are not new to Medicare. Research suggests that more than 70,000 Medicare beneficiaries may be eligible for the Medicare Savings Program in Colorado. Individuals whose monthly income is less than $951 ($1,281 for couples) and whose resources are less than $8,440 for an individual ($13,410 for a couple), excluding the house, one car, term life insurance policies, and irrevocable burial policies may be eligible to

have the Medicare Part B premium of $99.60 per month paid by Medicaid, thus increasing their monthly spendable income by $1,200 per year. Studies also show that approximately 18,000 Medicare beneficiaries may be eligible for Extra Help or Low Income Subsidy in Colorado. Those individuals, whose monthly income is less than $1,277 ($1,722 for couples) and whose resources are less than $8,440 for individuals ($13,410 for couples), excluding the house, one car, term life insurance policies, and irrevocable burial policies may be eligible for assistance for paying for the Medicare Part D of an average of $30 per month paid. In addition, the cost of their prescriptions is reduced to between $1.30 and $6.30. These and other topics will be covered at Medicare Monday from 9:30 a.m.-11:30 a.m. on October 15 at The Commons of Hilltop, 625 27-1/2 Road in Grand Junction. Medicare Monday is free and open to the public. Refreshments will be provided. Reservations are not required, but suggested. Call 855-2936911or visit Eileen Doherty, MS, is the Executive Director of the Colorado Gerontological Society, located at 3006 E. Colfax, Denver, CO 80206. She has more than 35 years of experience in education and training, clinical practice, research, and public policy in gerontology. Contact her at 303333-3482 or ■

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Financial planning 5



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RSVP’s local Senior Health Insurance Assistance Program (SHIP) can help. According to Mesa County RSVP SHIP Manager Ruth McCrea, SHIP navigators are also seniors and are volunteers who have gone through extensive Medicare training to help you navigate through the muddy waters of Medicare. They do not endorse or sell any product or service. They are focused only on helping you make informed decisions based on your needs. Mesa County RSVP takes walk-ins on 9 a.m. to noon, Thursdays only. Other days are by appointment. Call them at 243-9839. RSVP Colorado West serves Delta, Montrose, Ouray, Gunnison and San Miguel counties. Call them at 249-9639. High Country RSVP serves Garfield County. Call them at 947-8462.

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6 Financial planning

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The four must-have estate planning instruments By Jonathan J. David

Q. My husband died last year. While he was alive, we never engaged in any type of estate planning and fortunately there were not any issues when he died. However, now that I am single, my children have convinced me to engage in the estate planning process. Before I meet with a lawyer, can you give me an overview of what types of documents I should consider implementing? The following is a summary of the types of estate planning documents all individuals should consider implementing regardless of their age, the size of their estate, or whether they are married or single:

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IS YOUR PLAN FOR LONG TERM CARE TO NOT N EED IT? But what if you do need long term care services? You need to put a plan in place to  help your family and friends support your care needs longer  help protect your financial assets If you aren’t sure where to begin, attend this seminar and sales presentation to learn what you can do to help protect your family and to help pay for long term care services. Don’t wait until the day you need help. Reserve your place today. Seating is limited. Call now! Thursday, October 25, 2012;4:00 P.M. Olathe Professional Building 308 Main St.; Ste. 203 Olathe, Colorado R.S.V.P. by calling (970) 323-5755

will, then those assets that are titled in your name alone at death will pass according to state law. In other words, without a will, the state will control who receives your estate.

Financial and health care power of attorneys A durable power of attorney allows you to appoint an agent to act on your behalf if you are unable to act for yourself. In the case of a financial durable power of attorney, your agent can manage your finances, pay your bills and manage your day-to-day affairs if you are unable to do so. A health care durable power of attorney allows you to name a patient advocate to make your personal and health care decisions for you if you are unable to do so. If you fail to have either one of these power of attorneys and you become disabled and can no longer act for yourself, then a guardian or conservator will need to be appointed on your behalf, which will involve a court proceeding.

Living will A living will or advance directive allows you to instruct in writing what type of medical treatment you wish to receive if you are terminally ill or in an irreversible coma or persistent vegetative state. For instance, you can advise your family and your physicians with this document whether you want to receive life-sustaining treatment such as life support. Many times a living will is used in combination with a health care durable power of attorney.

Living trust A trust is a legal contract entered into between the person who es-

tablishes the trust (settlor) and the person who manages the trust assets (trustee) on behalf of the trust beneficiaries. The settlor creates a living trust during his or her lifetime wherein he or she is typically the sole beneficiary of that trust. One of the main reasons people establish a living trust is so that their estate will not have to go through probate. Probate is the process, which among other things, provides for the distribution of assets that were titled in a decedent’s name alone at the time of his or her death. Probate can be avoided for those assets, which are retitled in the name of a person’s living trust during that person’s lifetime. Any assets that are not retitled in the name of that living trust would have to be probated at that individual’s death. Besides probate avoidance, there are many other reasons for setting up a living trust. For instance, if you want a particular beneficiary, such as a child, to receive a portion of your estate, but you don’t want that child getting their entire share at the time of your death, you can direct the trustee to hold back that child’s share or portion of that child’s share for a period of time until that child is older or better suited to manage those assets. There are other documents of course, that you may want to consider implementing depending upon your circumstances, however, the above-stated documents are the basic documents that any individual should consider implementing. When you meet with the lawyer, you should be prepared to ask questions and discuss these documents in more detail. Good luck. ■

Lynette Rowland Regional Vice President Primerica

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Financial planning 7

Add a long-term care strategy to your retirement plan

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re you part of the 68 percent that has not decided to create a new financial plan since the financial downturn in 2008? Don’t let the financial crisis prevent or discourage you from planning for your potential long-term care needs. It may be more important than ever to consider adding a long-term care strategy to your retirement plan. Did you know that: • 10,000 Baby Boomers turn 65 every day. • 91 percent of them have never been asked about long-term care. Let’s start the conversation. Studies show that consumers consider their finances, but are not acting. Since the 2008 financial downturn, 20 percent have created a strategy or increased time spent with a financial professional. This number should be higher. Financial professionals need to be there for clients to talk with them about difficult topics

that may affect their future financial needs. Be in control of your future. It’s never too soon to talk about your potential long-term care needs. Having the right plan in place can help ensure you have the financial resources to help cover the costs while receiving the right quality of care. Planning helps you maintain your dignity and provides you the flexibility to participate in making choices that impact your care. To learn more about how to start the conversation about potential needs for long-term care, visit Article reprinted with permission from Genworth Financial, Inc. and submitted by Lynette Rowland, a licensed long-term care insurance agent in Colorado, with an office in Olathe, who can be reached at (970) 323-5755 or by email at lrowland. ■

What is a reverse mortgage? By Kristina Fessel, Security One Lending


Home Equity Conversion Mortgage (HECM), also known as a reverse mortgage, is a federally insured loan that allows older homeowners to convert some of the equity in their home into money they can use for a variety of purposes. You continue to live in and own the home, and there are no monthly mortgage payments. Repayment is not required until the borrower(s) no longer use the home as their primary residence. Qualifying for a reverse mortgage is simple. You must be age 62 or older, own your own home or condo, and qualify for enough money to pay off any existing mortgage. There are no income or credit requirements. Four things determine how much you can receive: 1) Age of the youngest borrower (the older you are, the more

money you receive) 2) Appraised value of your home 3) Current interest rate 4) The loan options you choose. You can receive the proceeds as a lump sum payment, fixed monthly payments, line of credit or a combination of these. A reverse mortgage can be used to improve your lifestyle by supplementing your monthly income, covering health care costs, paying off existing mortgages to improve cash flow or fixing up your home, for example. Whatever your specific goals, a reverse mortgage may help you maintain your financial independence. For more information about a reverse mortgage, contact Security One Lending Reverse Mortgage Consultant Judy Williamson at 623-1387 or email NMLS ID 853837. CO Loan Originator License #100039270 ■

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8 Financial planning

October 2012

Prepare for high health care expenses in your golden years with an annuity By Teresa Ambord


hat will it cost you and your spouse to pay your medical expenses after you retire? The research of one investment company says that a 65-year-old couple that retire this year can expect to pay out an average of—hold onto your hats—$240,000 out of pocket during their remaining years. That equates to about 61 percent of Social Security benefits for the next 15 years. In 2011, the estimate was $230,000 so it is creeping up fast. In fact, in the decade this investment firm has been calculating these costs, the figures have bumped up about 6 percent per year (and decreased one year), while Social Security benefits have risen about 2.3 percent annually. Believe it or not, some other estimates are even higher.

If you are still working, you might be able to work with your employer to consider retiree coverage of some sort, like a Health Savings Account that allows you to pay for qualified medical expenses on a federal tax-free basis. These accounts are portable and go with you if you change employers. But what if you are already retired? You probably know that one possibility for dealing with future medical costs is to purchase an annuity.

A variable annuity pays varying amounts, depending on how the underlying investments perform. Unlike their fixed annuity cousins, these annuities invest in a variety of investment products. The upside of variable annuities is that there is a chance of seeing higher returns. Naturally, the trade off is that you have to be willing to assume more risk. Both fixed and variable annuities allow for:

What’s an annuity?

• Tax deferred growth of earnings.

It’s an agreement between you and a financial institution, which results in you receiving regular payments for the rest of your lifetime or a set number of years, depending on the annuity you purchase. To purchase an annuity, you give the issuer a lump sum of money up front, or make a series of payments over time. Generally there are two types of annuities (though there are some variations out there). A fixed annuity pays a predetermined amount at regular intervals for a specific amount of time. This type of annuity may be tied to the performance of government-backed securities. Most people purchase fixed annuities as a way to help fund their retirement planning, on a tax-deferred basis. A fixed annuity usually comes with a guaranteed rate of return for some period and at some point, the rate is adjusted.

• A death benefit that will pay the beneficiary the greater of the account balance or a guaranteed minimum amount. • The option of receiving a stream of payments periodically for a definite period of time (say 20 years) or an indefinite period, such as your lifetime or the lifetime of your spouse. • Generally, for an additional fee, you can get a rider that specifies a guaranteed minimum payment and lifetime payment options, subject to certain terms and limitations.

The downside of annuities Annuities can be great tools to help you pay for whatever costs arise in retirement. But be aware, like most things, annuities have their downside. You are committing current funds long-term that will not be available now. If you take a withdrawal from

your annuity before age 59 1/2, the IRS will generally impose a 10 percent penalty. Because the annuity is purchased with before-tax funds, your distributions are taxable when they are received. If you believe taxes are headed upward, of course that means you’ll pay higher taxes when you receive the money than you would on the same funds now.

Questions to ask before you buy What commission is involved? Some annuities charge high commissions, which are not paid directly by the purchaser, but are taken out of the earnings. Therefore, it lowers your return. A commission is generally 5 percent or less. It’s a good idea to ask the salesperson what his or her commission will be. What is the re-set policy for the interest rate? Some annuities offer attractive rates, but only for a short time. At some point, the rate will be re-set, so find out what the issuer’s prior rate setting policy has been. The re-set is usually based on interest rates at the time. How much will it cost if you must surrender your annuity? Ask about surrender charges. You shouldn’t purchase an annuity unless you intend to keep it long-term. But there is always the chance that life will intervene and you will have to surrender the policy. Find out ahead of time what the surrender charges will be. How stable is the issuing company? Payment guarantees are based on the claims-paying ability of the insurance company, so check out a company thoroughly before buying an annuity. Your ability to get payment in the future depends on the stability of the insurer, and as we have witnessed in recent years, the appearance of stability is not enough. Ask the salesperson for a ratings report or ask at the public library for help. ■

BEACON - Financial Planning (October 2012)