Some Expenses Increase with Retirement

When considering retirement, many clients wisely consult with their financial advisors to ensure they have sufficient means to stop working.  Some, however, do not, or make the mistake of assuming their ability to retire based upon their current expenses.  However, they fail to consider just how much some expenses will increase.

U.S. households led by an individual who is 65 or older spend an average of $7,030 a year on health care, according to the Bureau of Labor Statistics’ latest data on consumer spending, which is for 2021.

Money Talks News’ recent article entitled “How Much Retirees Actually Spend on Health Care in the U.S.” says this translates to about 13% of the total spent each year by senior households ($52,141) and makes health care the second-largest spending category among those households. Only housing accounted for a bigger share of seniors’ spending in 2021. By comparison, all U.S. households spend an average of $5,452 a year on health care, which translates to about 8% of spending across all households ($66,928).

Here’s a detailed look at how senior households’ medical spending breaks down.

Health insurance. The average spending for a U.S. household led by someone age 65 or older is $4,974 per year. By comparison, the average spending across all U.S. households is $3,704 per year. Insurance is without a doubt the biggest health care expense for households of any age, but it’s highest for senior households. They spend $4,974 — around $415 a month — on insurance on average—roughly 10% of their total spending.

Medical services. The average spending for a U.S. household led by someone age 65 or older is $1,077 per year, compared to the average spending across all U.S. households at $1,070 per year. This type of health care expense includes a wide variety of care, such as:

  • Hospital room and services
  • Healthcare professionals
  • Eye and dental care
  • Lab tests and X-rays
  • Medical care in a retirement facility; and
  • Care in a convalescent or nursing home.

Drugs. The average spending for a U.S. household led by someone age 65 or older on medications is $726 per year, as opposed to $498 per year for the average spending across all U.S. households. This includes spending on prescription and nonprescription medications, as well as vitamins.

Medical supplies. The average spending by a U.S. household led by someone age 65 or older is $253 per year. The average spending across all U.S. households is $181 per year. This type of spending covers:

  • Various supplies, such as dressings, antiseptics, bandages, first aid kits, syringes, ice bags, thermometers and heating pads
  • Medical appliances, like braces, canes, crutches, walkers, eyeglasses and hearing aids; and
  • Rental and repair of medical equipment.

Housing.  Very rarely does a client tell me they don’t want to live in their home.  However, we all have to consider an increase in housing expenses if health won’t let us live at home.  The average costs of a nursing home in the Houston areas is less than $6,000.  Several of the places you’d prefer to live at are in the $7,000 to $10,000 range.  When I practiced in upstate New York it wasn’t uncommon to deal with nursing homes that cost $12,000 or more.  Many clients fail to consider these costs, which is why we end up discussing Medicaid for these costs.

If you are interested in this topic, you can see here for more:  https://galligan-law.com/elder-law-questions/  

Additionally, clients assume they can live at home with the aid of a professional care giver.  If health is such a concerned you need to be under the supervision of a doctor, then this won’t cover it.  Even if it does, and many people use this for a limited time, the cost isn’t much less.  Most services will cost between $20-25 an hour easily.  Let’s assume you only need 8 hours of care at that rate.  Assuming 30 days a month and $20 an hour, you are talking about $4,800.  Most people using this service need more hours.  In short, the cost is there regardless.

Reference: Money Talks News (Oct. 25, 2022) “How Much Retirees Actually Spend on Health Care in the U.S.”

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Can a 529 Plan Help with Estate Planning?

Parents and grandparents use 529 education savings plans to help with the cost of college expenses. However, they are also a good tool for estate planning, according to a recent article, “Reap The Recently-Created Planning Advantages Of 529 Plans” from Forbes.

There’s no federal income tax deduction for contributions to a 529 account. However, 35 states provide a state income tax benefit—a credit or deduction—for contributions, as long as the account is in the state’s plan. Six of those 35 states provide income tax benefits for contributions to any 529 plan, regardless of the state it’s based in.

Contributions also receive federal estate and gift tax benefits. A contribution qualifies for the annual gift tax exclusion, which is $16,000 per beneficiary for gifts made in 2022. Making a contribution up to this amount avoids gift taxes and, even better, doesn’t reduce your lifetime estate and gift tax exemption amount.

Benefits don’t stop there. If it works with the rest of your estate and tax planning, in one year, you can use up to five years’ worth of annual gift tax exclusions with 529 contributions. You may contribute up to $80,000 per beneficiary without triggering gift taxes or reducing your lifetime exemption.  Keep in mind that you are just making a lump sum gift, so gifting in the next 4 years to that 529 beneficiary is taxable.

You can, of course, make smaller amounts without incurring gift taxes. However, if this size gift works with your estate plan, you can choose to use the annual exclusion for a grandchild for the next five years. Making this move can remove a significant amount from your estate for federal estate tax purposes.

While the money is out of your estate, you still maintain some control over it. You choose among the investment options offered by the 529 plan. You also have the ability to change the beneficiary of the account to another family member or even to yourself, if it will be used for qualified educational purposes.

The money can be withdrawn from a 529 account if it is needed or if it becomes clear the beneficiary won’t use it for educational purposes. The accumulated income and gains will be taxed and subject to a 10% penalty but the original contribution is not taxed or penalized. It may be better to change the beneficiary if another family member is more likely to need it.

As long as they remain in the account, investment income and gains earned compound tax free. Distributions are also tax free, as long as they are used to pay for qualified education expenses.

In recent years, the definition of qualified educational expenses has changed. When these accounts were first created, many did not permit money to be spent on computers and internet fees. Today, they can be used for computers, room, and board, required books and supplies, tuition and most fees.  They have become fairly expensive.

The most recent expansion is that 529 accounts can be used to pay for a certain amount of student debt. However, if it is used to pay interest on a loan, the interest is not tax deductible.

Finally, a 2021 law made it possible for a grandparent to set up a 529 account for a grandchild and distributions from the 529 account are not counted as income to the grandchild. This is important when students are applying for financial aid; before this law changed, the funds in the 529 accounts would reduce the student’s likelihood of getting financial aid.

If you want to explore more ideas on how to pay for a loved one’s education, see this article:  https://galligan-law.com/how-grandparents-can-help-pay-for-college/  

As a quick aside, contributions to a 529 plan for a child or grandchild are also exempt as transfers under Medicaid.  This means that if you are in a spenddown situation trying to become eligible for Medicaid, contributions to this fund might be very attractive.

Two factors to consider: which state’s 529 is most advantageous to you and how it can be used as part of your estate plan.

Reference: Forbes (Oct. 27, 2022) “Reap The Recently-Created Planning Advantages Of 529 Plans”

 

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Revocable vs. Irrevocable Trusts

A living trust can be revocable or irrevocable, says Yahoo Finance’s recent article entitled “Revocable vs. Irrevocable Trusts: Which Is Better?” It is certainly true that not everyone needs a trust, and there are many different types of trusts you can establish. But, when considering a trust, clients need to consider the pros and cons of revocable versus irrevocable trusts.

Revocable Trust

A revocable trust is a trust that can be changed or terminated at any time during the lifetime of the trustor (i.e., the person making the trust). This means you could:

  • Add or remove beneficiaries at any time
  • Transfer new assets into the trust or remove ones that are in it
  • Change the terms of the trust concerning how assets should be managed or distributed to beneficiaries; and
  • Terminate or end the trust completely.

When you die, a revocable trust automatically becomes irrevocable and no further changes can be made to its terms.

The big advantage of choosing a revocable trust is flexibility. A revocable trust allows you to make changes and to grow with your needs. Revocable trusts can also allow your beneficiaries to avoid probate when you die.  Most clients use revocable trusts during their lifetimes, although they might establish irrevocable trusts for other people or to address specific circumstances.

However, a revocable trust doesn’t offer the same type of protection against creditors as an irrevocable trust. If you’re sued, creditors could still try to attach trust assets to satisfy a judgment. The assets in a revocable trust are part of your taxable estate and subject to federal estate taxes when you die, which is usually a good thing, but in some assets isn’t sufficient tax planning.  It also provides no advance asset protection for Medicaid.

Irrevocable Trust

An irrevocable trust is permanent. If you create an irrevocable trust during your lifetime, any assets you transfer to the trust stay in the trust. You can’t add or remove beneficiaries or change the terms of the trust.

Irrevocable trusts are commonly used for creditor protection or tax planning.  There are times, such as when considering long-term care Medicaid in a nursing home, or reducing the size of your estate for estate tax purposes, that you want the asset not in your name and out of your personal control.  The irrevocable trust can achieve that by having the trustee own it instead of you.

Irrevocable trusts created during your lifetime are often done in addition to a revocable trust so that you achieve the particular benefits of an irrevocable trust only for that property which needs the advantage.

Irrevocable trusts are more commonly something you set up to be effective at your death.  We’ve written extensively on this, but it is extremely common to leave your children’s inheritance to them in irrevocable trusts that set the rules by which they benefit from the trust and provide creditor and divorce protection to the beneficiary.  This also works with spendthrift beneficiaries and similar trusts are used when a beneficiary has a disability and is using government benefits.

See here for more:  https://galligan-law.com/how-do-trusts-work-in-your-estate-plan/  

It is worth noting that irrevocable trusts, despite their name, sometimes can be revoked, changed or you can remove property from them.

For example, irrevocable trusts might have a power of substitution allowing you to take out property as long as you put equal value property back in.  Irrevocable trusts can sometimes be revoked or changed by the agreement of all parties (including beneficiaries) although that doesn’t work if minors are involved.  Irrevocable trusts that are broken and no longer serve their original purpose can also sometimes be fixed by a process called decanting.  It involves creating a new trust and “decanting” the assets of the first into the second.

If you are using irrevocable trusts you are working with very sophisticated tax and creditor laws, so you’d have to check with your attorney if those options will fit with the trust you are creating.  It is also not something we like to rely on, which is one of the reasons irrevocable trusts are used less.

Speak with an experienced estate planning or probate attorney to see if a revocable or an irrevocable trust is best for you and your goals.

Reference: Yahoo Finance (Sep. 10, 2022) “Revocable vs. Irrevocable Trusts: Which Is Better?”

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