Pennsylvania Trusts and Estates Blog

Must Read:  Steelers and Estate Tax  at Neil Hendershot's PA Elder, Estate & Fiduciary Law Blog.

Both the Arizona Cardinals and the Pittsburgh Steelers are family-controlled.  To give you an idea of the estate tax problem, a 2007 Forbes article estimated the fair market value of the Steelers at $900,000,000.

Is there a lobby for a football team exmeption to the estate tax?

You're retired, you own your own home, but the funds don't stretch the way they used to and suddenly you need more income. Maybe you need to fix the roof. Or your medical bills have increased. Or, simply, inflation has eroded your retirement fund.

Where's the money going to come from? You can sell your house for cash, but then, where do you live? A home equity loan may provide immediate cash, but that increases your monthly payments.

A reverse mortgage might be a solution. A reverse mortgage is a loan against the equity in the home that provides a tax-free lump sum or cash advances but requires no payments during the term of the loan. You can get a stream of payments for a term or for life, or a lump sum payment, or a line of credit, or a combination of these.

A reverse mortgage, like any mortgage, involves interest, closing costs and fees. However, the debt you accumulate on the loan is not payable until you die, sell your house or move. The title to the home remains in your name and you are still responsible for home insurance and upkeep. If you die before the sum of payments plus interest equals the equity in the house, your estate gets the difference. If you sell the house, the proceeds are used to pay back the loan.

The loan is a "non-recourse" loan, which means that no matter how high the loan balance grows, you or your heirs never owe more than the home's market value. If you live a long time and the sum of the payments plus interest exceed the equity in the house, the FHA or FNMA reimburses the bank for the excess, not the estate. When the last co-owner dies, the institution gets the house as payment for the loan. Your estate is never subject to payments to the bank.

To qualify, you must be 62 years old, own your home or condominium or at least have a mortgage small enough to be paid off at closing, and agree to accept mortgage counseling from a HUD-approved counseling agency. If two owners are involved, the age of the younger owner will prevail.

In addition to the equity you have in your home, the funds you are able receive from a reverse mortgage are determined by the interest rate charged on the borrowed money and the age of the younger spouse. Lower interest rates yield larger payments. Older age yields larger payments.

The IRS currently treats monies received from a reverse mortgage to be loan advances and not taxable income. The interest that accrues is not deductible until the loan and interest is repaid, which only occurs if the owner sells the house before death of the last owner.

There are three types of reverse mortgages available. The least expensive, that is with the lowest fees and typical interest rates, is the Single Purpose Reverse Mortgage. This type is usually available through state or local governments and is to be used for home repairs or property tax payments. With the exception of programs designed to defer yearly property tax payments, only a lump sum payment, designed to cover a specified expense, such as repairing the roof, is available.

The FHA offers the second type of reverse mortgage, the Home Equity Conversion Mortgage (HECM). You may choose a combination of a lump sum payment, periodic cash advances or regular, such as monthly, payments. You may borrow up to the value of the equity in your home or the home equity limit set for your county of residence by the Federal Housing Administration, whichever is lower. For Lancaster County, that limit is $144,336.

If your home is valued much higher than the home equity limit for your county, a third reverse mortgage option is available, a Proprietary Reverse Mortgage from a private lender, insured by Fannie Mae. Interest rates, closing costs and fees for this type loan are much higher than the HECM and should be considered only if the need for funds is higher than the home equity limit.

How does a reverse mortgage affect Medicaid and Medicare? Medicare and Social Security do not care about assets. On the other hand, Medicaid does look at your assets, including your home. Payments from a reverse mortgage may be considered as income and may effect Medicaid eligibility. States run their programs differently, so you are encouraged to check with your local Office of Aging for more information.

There are some very good reasons for using a reverse mortgage. These include paying off your present mortgage, catching up on back taxes, preventing foreclosure due to debt on your home, paying for long term care insurance, paying for in-home health care, updating a house to meet changing needs, and increasing monthly income to catch up with inflation.

However, there are also bad reasons for obtaining a reverse mortgage. These include getting a lump sum for reinvestment, getting money for a short term debt, helping a relative to start a new business, and helping a relative or friend get caught up on delinquent debts.

Reverse mortgages can be complicated. Before deciding to obtain one, do your homework. Visit the AARP website, www.aarp.com/revmort/, or write for their booklet on reverse mortgages.

Also see the Bacon/Wilson Update on Reverse Mortgages

Entrust Group launched a new service for IRA owners. Now you can access your IRA with the swipe of a debit card.  Want that new pair of shoes -  go ahead -  use your IRA money.  Want to go on vacation - use your IRA.

This is the worst idea I have heard in a long time.  Phyllis Furman, writing for the Daily News:"The IRA Card is the new and improved way to access your Individual Retirement Account," said Entrust CEO Hugh Bromma.

"It's just like any other debit card. You can use it at a store, restaurant or travel agency."

But critics of products like the IRA Card and 401(k) cards warn they can be dangerous because they allow you to quickly tap into funds that should be locked away and growing for your retirement.

"Retirement money is to be used for retirement," said John Graziano, a CPA with Future Financial Planners in Bayonne, N.J. " 

If you use your IRA debit card, not only do you spend your retirement savings, but you have to pay income tax on the amount withdrawn and, if you are under 59-1/2, pay a 10% premature distribution penalty. 

This is a product option to which we recommend you "Just Say No."

 Blogging credit to Neil Hendershot.

Looks like we won't be throwing Momma from the train in 2010 when there is no estate tax.  According to this WSJ article Obama plans to sponsor legislation that will keep the estate tax in effect and keep the exemption at $3.5 million -  which is where it is now since January 1, 2009.  The rate over the exemption will be as currently in effect - 45%.

You don't have to take a required minimum distribution (RMD) from your IRA in 2009.

Under the Worker, Retiree, and Employer Recovery Act of 2008 (WRERA) signed by President Bush on December 23, 2008, RMDs for IRAs and other qualified defined contribution plans are suspended. It is a one year waiver for 2009 only.

This is welcome news to retirees who are looking at accounts whose values have steeply declined. The amount required to be withdrawn is determined by reference to the account value at the beginning of the year. When investment values decline sharply, a RMD taken later in the year takes a bigger chunk of the balance in the IRA.

IRA owners and beneficiaries may not want to withdraw assets from retirement accounts at this time because they may need to sell stocks and bonds at a depressed price in order to access their funds. The hope is that the market will rebound by 2010, at which time it would be more logical to sell the stocks and bonds to meet the RMDs.

Many hoped that relief would be granted for 2008 since the 40% stock market decline occurred during calendar 2008. However, WRERA does not provide any relief for 2008 RMDs. This is very unfortunate. Apparently Congress thought the implementation of such a late change in the tax law wouldn't work. For some taxpayers, the ability to skip a year will make up the loss. Of course, that assumes you can afford not to take your RMD - which cannot be assumed. WRERA does not provide relief for those persons who actually need to use their IRAs and retirement accounts for their support - in these cases the individuals will still take distributions regardless of the suspension of the RMD rules.

Consequently, the primary beneficiaries of the RMD relief rules of WRERA are those account owners and beneficiaries who have sufficient other income or assets so that they do not need to take any withdrawals from their retirement accounts.

There is talk that when Congress reconvenes in January that there still might be some relief for 2008, but a waiver of the RMD for 2008 looks very unlikely.

IRA owners are required to take a minimum annual amount out of any traditional IRAs beginning in the year when they reach 70 ½ years of age, or no later than April 1 of the following year. For example, if you turn 70-1/2 in 2009, you would normally be required to take your first RMD by April 1, 2010.

The RMD is calculated based on the owner's age (older folks must take out more) and the IRA balance at the end of the previous year. The RMD provision also applies to traditional 401(k)s but not to an individual's own Roth IRAs or Roth 401(k)s. Roth IRA distributions are not taxable. Failure to make a RMD triggers a 50% penalty tax calculated against the RMD that should have been distributed in that particular year.

You must also take RMDs if you are a beneficiary of a decedent's IRA, 401(k) or other retirement account, because when the account owner dies, regardless of age, you must begin taking RMDs. This is also true if you are the beneficiary of a Roth IRA, even though Roth IRA owners are never required to take RMDs.

Normally, people who reach age 70½ in 2009, and who wait until April 2010 to take their first withdrawal, would have to take two distributions in 2010: one for 2009 (their first distribution) and one for 2010 (their second distribution). That second distribution would have to be taken by Dec. 31, 2010.

Since the new law suspends distributions for 2009, first-timers -- anyone who turns 70½ in 2009 -- won't be required to make a 2009 withdrawal, which normally would not have to take place until April 1, 2010. But he or she will need to make the 2010 withdrawal, and that will be considered your "second" distribution, even though in reality it will be your first withdrawal. Therefore you'll have to take it by Dec. 31, 2010. (Individuals who turn 70½ in 2009 will not be able to wait until April 1, 2011 to take their first withdrawal.)

For beneficiaries of inherited IRA's who are taking the money out under the five year rule, you can stretch your five-year deadline out by another year.

These provisions provide relief to participants in and beneficiaries of IRAs, SEP-IRAs, SIMPLE IRAs, 401(k) plans, money-purchase plans and profit-sharing plans. WRERA does NOT apply to defined benefit plans.

Another provision added by WRERA is that qualified plans will be required to allow non-spousal beneficiary rollovers to inherited IRAs effective in 2010 (this provision is currently optional and the vast majority of plans have not offered the option).