Legal and financial advisers can help you navigate complex issues

Keeping one’s financial and legal house in order is always important, and it doesn’t diminish as we age. We cannot afford to put off difficult conversations in order to ignore the natural process of aging.

Estate planning, which includes writing a will and possibly establishing a trust, also generally includes the all-important durable powers of attorney for health care and for property, said James Siebert, an Arlington Heights-based attorney specializing in Elder Law.

Powers of attorney allow you to choose who is going to make health care decisions and control your money if you are incapacitated. With all of the new privacy laws in place, this document is essential for everyone over the age of 18, Siebert said.

“Wills assure that when you die your estate doesn’t need to be probated ‘intestate,’ where your heirs will have to pay a bond to guarantee that they won’t run off with their own money. I tell my clients who doubt the need for a will ‘because everything will go to my kids anyway’ that the legal fees and costs involved in intestate probate will cost the estate more than what you would have paid to have a will drawn up,” Siebert said.

He also strongly advises his clients against putting their children’s names on their various accounts, which some people want to do to avoid probate.

“When you do that you make your assets available to the creditors of your child,” he said. “If they get into a car accident, for instance, and have not carried enough auto insurance, the creditor can seek to satisfy its judgment out of your assets that have your child’s name on them.

“You can also run into a problem if you and your child disagree. That child could try to impose their will on you by refusing to allow you to make your own decisions. If you decide you want to sell the family house and buy a condominium down in Florida, and your child does not think that it is a good idea, the child can block the sale of your own home. Things happen in life. What happens if your child runs into financial problems? If they are on your bank accounts, they have access to your funds to use to solve their problem without consulting you. You cannot always predict what they will be and you don’t want to put yourself in a difficult position with a particular child,” Siebert said.

If you want to avoid the costs and problems associated with probate all together, Siebert advises his clients to establish a living trust. Not only does a trust avoid probate upon your death, it also helps your family assist you if you become incapacitated. Trusts can be tailored for each person’s needs, so it is important for clients to be clear about their situation when they speak with an attorney. For instance, if you have a child whom you cannot trust with a lump sum of money, you can have the funds allocated on a timeline or at certain life events, or you can even set up the trust to just pay the child a set amount, he said.

It is particularly important for parents of special needs individuals to set up an appropriate trust to protect that individual after they are gone. Parents with special needs children can set up a special needs trust in which money can be held separate and apart for their benefit without jeopardizing their government benefits. The money in the special needs trust can be used to pay for things not covered by government benefits, (whether it is to buy the child clothing or special therapy or something they want like a bicycle or a fun vacation). The money in the special needs trust is also protected from the special needs individual’s creditors, as well as the creditors of the individual trustees.

“The purpose of a trust is to handle your unique needs and those of your family members,” Siebert said. “So you need to lay out your situation to your attorney and he or she will advise you about what solution is appropriate for you.”

Another example Siebert gave of why someone would need a trust is where a person or couple owns real estate in multiple states, such as the primary home here and the condo in Florida or the cabin in Wisconsin. Real property must be probated in the state where it is located. Setting up an appropriate trust and putting the property into the trust can avoid multiple probates.

“If you don’t set up a trust and transfer the properties into it (because a trust never dies), you will have to go through ancillary probate, which is extremely expensive and involves hiring different attorneys in each state and stopping and starting the process in Illinois as it moves forward in the other states,” Siebert said.

Many estate planners are not equipped to handle these more complicated matters, so people with these issues need to consult an attorney specializing in elder law who can see the whole picture, he added.

An elder law attorney can also protect a person’s interests when they are already in a nursing home, Siebert said.

“If Grandmother only has $50,000 left and her care facility is costing $7,000 per month, it is probably time to think about doing the paperwork to get her on Medicaid,” he said. “But once she is on Medicaid, she can only keep $30 per month from her Social Security and pension income. The balance must be paid to the facility. On $30 a month, it is even difficult to get her hair done once a week. So instead of continuing to privately pay for the nursing home for another seven months until the money is all gone, you can take that remaining $50,000 and put it into a ‘pooled trust’.”

With a pooled trust, Siebert said, you can get Medicaid to begin to pay immediately while Grandma gets to use the money for her benefit while she lives. You can pay for the extras like hearing aids, dentures, clothing, hair appointments, phone and cable bills and even for an occasional massage to alleviate tingling in the extremities. But once she dies, Medicaid gets reimbursed out of the pooled trust because they have a lien on it.

“When choosing a facility, if you have limited means but can afford to pay for several years, make sure that the facility accepts Medicaid, because if the facility does not accept Medicaid and you run out of money, they can evict you. They have to find another place for you to go, but it may not be a place you will like,” he added.

Long-term care is also something that Siebert advises clients on.

“The purchase of long-term care insurance can put you in a better position to protect the assets of the stay-at-home spouse, so he or she does not become impoverished. And if the person is single, it can ensure that their time in a care facility is more comfortable,” he said.

Mike Gibbons, a registered representative and principal within Consumers Credit Union in Lake County, is also a proponent of long-term care insurance.

“I am afraid that few financial planners are spending much time discussing long-term care but I stress the need for a strong financial foundation and see long-term care insurance as part of that. Care can cost $50,000 to $70,000 per year and that can run anyone out of money eventually, so I need to have that discussion with my clients,” Gibbons said.

“Most people don’t seem to have a good handle on what long-term care is, but in reality, they will need to buy insurance, or fund it themselves, or a combination of both,” he said.

Most companies will build long-term care policies that allow for home care first and then care in a skilled facility so that even if you get in an accident at age 55, you can receive care in your own home, Gibbons said.

Gibbons also makes sure his clients, most of whom did not grow up with large assets but who now have $400,000 to $500,000 at retirement, put a formal estate plan in place. He refers them to an attorney for this part of the puzzle and then works with them to protect their income for the future.

“Most of my clients are bottom-line people who want to know that no matter what happens, their income will remain steady,” he said.

So Gibbons steers them into annuities that protect their income but also give them the benefit of the stock market when it is up; or into managed accounts; or into no-commission mutual funds for which they pay one flat annual fee. Since his broker has arrangements with thousands of different funds, his clients are able to move their money from fund to fund without transaction fees and they can get their money out at any time without a penalty. These types of funds allow a client to put their money into stocks, bonds, exchange-traded funds and even annuities in any combination they wish, Gibbons said.

Nick Sloane is principal of Sloane Wealth Management, which is a Registered Investment Advisor firm, and president of Sloane Financial Services, both based in Warrenville. Registered Investment Advisors, or RIAs, are the only type of financial advisers who are legally bound to act in a client’s best interest. Most stockbrokers, for instance, do not have this legally required fiduciary responsibility, Sloane said.

“Trust is at a premium these days and you want to work with someone who looks out for their clients’ interests first. Ask the adviser you are talking to for his or her ‘ADV’ form, which all RIAs have to give out for the asking,” he said.

An ADV form is filed with the Securities and Exchange Commission and discloses information about the advisement firm, such as its investment style and services provided.

“Planning for retirement should start during your working years by participating in a 401(k) or IRA and putting as much money as you can into it. Furthermore, Roth 401s are now available in many cases and it is better to bite the bullet and pay the tax now. You also don’t have to take money out of a Roth account when you turn age 70 and a half, like you do with a traditional retirement account,” he said.

A Roth plan is “a tremendous wealth-transfer tool because a spouse can also inherit it and not have to withdraw the money immediately,” Sloane said. If you have a traditional IRA and you do not want to take the Required Minimum Distributions (RMDs), Sloane said he often advises people in good health to withdraw the money after they are 59½ over a period of a few years and use it to buy a life insurance policy. They can then either leave a very significant tax-free benefit to their families (and even set it up to be estate-tax free), or they can utilize the cash value to provide tax-free income for the rest of their lives.

“Someone is going to have to pay taxes on an IRA at some point; with a traditional IRA, you can see up to four levels of taxation: tax on the withdrawals, tax on the reinvestment of withdrawals, income tax for beneficiaries and even estate taxes,” Sloane said.

Annuities can also provide someone with guaranteed, risk-free income for life.

“To the best of my knowledge, no insurance company has ever defaulted on an annuity, while FDIC-backed CDs and government-backed securities are also protected, of course,” he said.

Like Gibbons, Sloane is partial to indexed annuities, as well as market-linked CDs that are linked to a group of stocks and have the potential to pay significantly more than a regular CD or fixed annuity, while the principal is totally safe and you get to keep all of the interest you earn.

“I advocate these products over Treasury bonds, which aren’t paying much of anything these days, as well variable annuities that can have high fees when it comes to the money that people want to protect from stock market risk,” he said.

“Thirty years ago when the market started its unprecedented rise, the average person had little, if anything, in the way of money invested in the market,” Sloane said. “What I see all too often are older people with way too much money at risk and the risk they are taking is often unnecessary.”

“They also think they are well-diversified when they really are not. I introduce people to the Rule of 100, for starters,” he said. Subtract your current age from 100 and that is the percentage of your investments that you should risk in the stock market.

“Seniors really have to watch out that they don’t lose money as they have less time to recoup,” Sloane said.

He is also concerned that many seniors do not have an income plan and have no idea what their money assets can do for them. They also don’t realize how significantly inflation can impact their need for greater income and they aren’t aware of what they can do to reduce their tax bill.

Sloane takes into account everything a senior has when coming up with an income plan — especially for someone who is concerned about having enough money to sustain them.

“The core priorities I look at are: income, preservation of wealth, growth and liquidity. Depending on how much liquidity someone feels they need, we put together a comprehensive plan,” he said.

It can include many different financial vehicles including, but not limited to, flexible annuities that allow some access to principal without penalty; income riders on annuities that allow you to pay a small fee and then after a year (or any point thereafter) you can start getting income; and even investing in precious metals as a hedge against inflation. He also manages risk-based money on a fee basis.

He is also a fan of long-term care insurance, especially when it is purchased before someone turns 60. The extra years you pay fees are still a bargain when you consider the fact that premiums can increase as much as ten percent per year as you age and increases on existing policyholders are now severely limited by law.

People who are older or who don’t like the idea of writing large checks for something they hope they never use should look into asset-based long-term care, Sloane said. With it you can buy an annuity or life insurance policy that allows you to leverage a portion of your savings and then use it on a tax-free basis for long-term care expenses. “The asset-based plan needs to be a ‘qualified’ plan under the Pension Protection Act to ensure that the benefits used are going to be tax-free,” Sloane said.

The benefit of the asset-based plan is if you don’t use it for long-term care, the money you set aside still grows and will go to designated beneficiaries at death, or you can even recoup the money while you are alive if you change your mind and cancel the policy. Since the rules on Medicaid have now changed you need to buy a long-term care policy that will pay out for at least five years. This is now the so-called “look-back” period, where assets could be transferred out of a person’s name and, if he or she is still alive at the end of the long-term care benefit period, none of those assets can be touched, Sloane said.

A last resort for those running out of money, he added, is a reverse mortgage.

“This could be a legitimate planning tool under certain circumstances, but it would probably be better to sell your house to your children with the caveat that you may stay in the house as long as you maintain it and you pay the property taxes and other upkeep or whatever you and your children decide,” he said.

“But if you do need to tap into the equity of your house and don’t want to sell it, a reverse mortgage is possible and you shouldn’t be deterred by misinformation. The bank won’t own your house and they can’t kick you out of it. In fact, if you think housing prices will continue to drop, you might want to consider getting a reverse mortgage sooner versus later. If housing prices rebound, your family can still benefit, depending upon how much of the reverse mortgage proceeds have been used for living expenses” Sloane said.