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DHJJ Financial Advisors offers insight on a variety of topics. From current market events to our perspective on timeless financial topics, you will find that our articles provide information that will help you to navigate your own financial landscape.

ABLE Accounts: What You Need to Know

ABLE Accounts for DisabilitiesAchieving a Better Life Experience Act of 2014, or the ABLE Act of 2014, encourages and assists individuals with disabilities and their families in saving private funds in a tax-advantaged savings account.  These funds can be used to pay for education, health care, transportation, housing and other expenses. Here are some of the most frequently asked questions about ABLE accounts:

 

1.      What is an ABLE account?

ABLE accounts are tax-advantaged savings accounts for individuals with disabilities and their families.  Similar to college savings 529 plans, the earnings from ABLE accounts do not get taxed. Many individuals with disabilities depend on public benefits for income, health care, and other assistance.  Eligibility for public benefits often requires meeting a means or resource test that limits eligibility of a beneficiary if they accumulate assets over $2,000.  An ABLE account gives eligible individuals and their families the ability to establish a savings account that will not affect their eligibility for SSI, Medicaid and other public benefits. 

 

2.      Have ABLE accounts always been around?

No, the federal ABLE Act of 2014 allowed for the creation of these accounts.  The bill was signed by President Obama in December of 2014. 

 

3.      Who is eligible for an ABLE account?

Individual beneficiaries are eligible to open an ABLE account if they meet Social Security’s definition and criteria regarding significant functional limitations and have a letter of certification from a physician.  Beneficiaries need to have the disability onset before the age of 26, but contributions can be made after the age of 26. 

 

4.      Are there limits on how much I can put in an ABLE account?

Yes, there are annual limits for each ABLE account.  Annual contributions per beneficiary are limited to the federal gift tax limitation.  Currently, this amount is $14,000 per year.  Many states have set a limit on the amount that can accumulate in an ABLE account.  In addition, the ABLE Act set some further limitations, stating the first $100,000 in ABLE accounts would be exempt from the $2,000 SSI individual resource limit.

 

5.      How can I open an ABLE account?

Various institutions allow an eligible beneficiary to establish an ABLE account - some can even be opened online.  If you are an Illinois resident looking to open an account, visit the following website for more information and to get started:  www.savewithable.com/il/home.html

ABLE accounts can be beneficial in providing a tax-advantaged way to provide additional resources for disabled individuals without impacting their eligibility for federal benefits. For more information on Illinois ABLE accounts, please visit the Illinois State Treasurers’ website at: www.illinoistreasurer.gov/Individuals/ABLE.

 

How Can DHJJ Financial Advisors Help?

If you have other questions on ABLE accounts and how it may impact your overall financial plan, please contact Cammy Corso at This email address is being protected from spambots. You need JavaScript enabled to view it. .

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Financial Planning Checklist for 2017

Have you thought about how much money you need to retire?  Or if you have enough insurance—or even the right kind? Or if there is anything more you can do to save taxes throughout your lifetime?  These are just a few questions you can answer by doing a comprehensive financial plan.

According to a national survey conducted in 2016 by the Certified Financial Planner Board of Standards, Inc., more than 52% of American households are unsure if they will have enough money in retirement.  Only 35% have used a financial planning professional to assess their situation and create a plan for the future.  Financial planning can benefit people of any income level by answering some of these “unknowns”.  Here are seven financial planning areas to think about in 2017.

  1. Set your savings goals and create your cash flow plan. Have you put your financial goals on paper?  Do you know where you will be financially this year, or next year, or in retirement? Putting a cash flow plan in place and keeping it current every year will help you achieve what you’ve set out to do, financially.
  2. Create your estate plan. Basic estate planning documents include a will, a durable power of attorney for financial matters, a healthcare power of attorney for health care matters, and a living will. Significant life events such as births, deaths, divorces, marriages, or changes in state residency often lead to changes in your goals, so documents should be reviewed and updated to reflect these changes, as needed.
  3. Get an insurance review. Consider all types of insurance needs, including life, long-term care, and disability coverage.  They all serve a different purpose.  The insurance industry is constantly changing. New products become available, premiums may go up or down, and what you needed five years ago may be different than what you need today. If you are wondering about your existing policies and if they are still in line with your needs, have an insurance review done and discuss with your advisor if you still need the policies you have or if you want to add any additional coverage.
  4. Understand your investment strategy. Is your investment strategy still in line with your risk tolerance, your time horizon for retirement, and your cash flow needs now and in the future? A financial plan will show you how much risk you need to take on to grow your assets to the amount you will need in the future. From understanding your needs, you can then decide how much risk you want to take on.
  5. Look at asset location. Where are you holding your assets? From a tax standpoint, there are three different “buckets”: (1) a taxable account; (2) a tax deferred account like a Traditional 401(k) or a Traditional IRA; and (3) a tax-free account like a Roth 401(k) or a Roth IRA. Starting with where your assets are located today, think about if there are any changes you can make to create more tax-efficient accounts and maximize your after-tax returns over your lifetime. For example, consider holding your dividend paying stocks in the taxable accounts as the income these investments generate get preferential tax treatment at “qualified rates” (up to 23.8% at the top federal bracket) vs. bonds that pay ordinary income and get taxed at your marginal tax rates (over 43% at the top bracket).
  6. Consider a Roth conversion. Roth conversion can be a powerful tool in your overall financial plan. Assess your personal situation and see where your tax bracket is today vs. where it might be in the future.  If you are in a lower bracket today, it may be an opportunity to shift money from a tax-deferred bucket (Traditional IRA) into a tax-free bucket (Roth IRA). If you can use lower tax rate years to move money into tax-free accounts, this will minimize the taxes you pay on traditional retirement distributions over your lifetime.
  7. Do a multi-year tax plan. Your cash flow plan will help lay out your taxable income levels over the years.  The biggest tax savings come from taking advantage of deductions in high tax rate years and taking advantage of income recognition in lower tax rate years.  In addition, there may be years you can take advantage of certain deductions you would otherwise lose out on if you fall into paying the Alternative Minimum Tax. Running a tax projection every year to see how the current year compares to the following year will help identify tax savings opportunities and reduce the taxes you pay over your lifetime.

How DHJJ Financial Advisors Can Help

Your plans will change throughout your life and your financial plan should change with you. Contact DHJJ Financial Advisors to work with a Certified Financial PlannerTM or email Cammy at  This email address is being protected from spambots. You need JavaScript enabled to view it. .

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Individual Retirement Account (IRA) Contributions

Individual Retirement Account (IRA) Contributions

In an era where pensions are few and far between and future Social Security benefits are in question, it’s important for individuals and their families to save for their own retirement.  A great and simple way to save for your retirement (with potential tax savings) is through an Individual Retirement Account (IRA).  IRA contributions for tax year 2016 are due by April 18, 2017 (this year’s “tax day” as opposed to April 15).

TRADITIONAL vs ROTH IRA

For eligible taxpayers, the traditional IRA offers a current tax savings opportunity in the form of a tax deduction for the amount of your contribution. Future withdrawals of traditional IRA principal and earnings are taxed at ordinary income tax rates. Roth IRA contributions are not deductible, but qualified withdrawals are tax free. Roth IRAs offer the advantage of tax-free growth.

RULES, ELIGIBILITY, AND LIMITATIONS

Traditional and Roth IRAs have the following rules and limitations:

     
  • Maximum annual contribution is $5,500 per individual; $6,500 if age 50 or older for the contribution year. (this maximum is for traditional and Roth combined)
  • Taxpayers age 70.5 and over are not eligible to contribute to traditional IRA, but Roth contributions are still an option.
  • Contributions are limited to taxable compensation for the year.  For married-filing-joint taxpayers, one spouse’s taxable compensation may allow a spouse without sufficient taxable compensation for the year to contribute to their own IRA.
  • You can withdraw your money at any time, though non-qualified withdrawals (generally distributions prior to age 59.5) may incur tax and penalties. There are certain exceptions to the age 59.5 rule; consult your tax advisor or visit www.irs.gov for more on the exceptions.

Depending on your filing status, your income level, and whether you or your spouse are covered by a retirement plan at work, deductible traditional contributions and Roth contributions may be limited or completely phased out.   For example, a married couple with income over $194,000 cannot contribute to Roth IRA, nor can either deduct traditional IRA contributions if one spouse is covered by a plan.  Visit www.irs.gov for the different income limitations based on your filing status and plan coverage.

Is your income too high to contribute to Roth or deduct an IRA contribution?  Consider a non-deductible IRA contribution.  Ask your advisor whether a “back-door Roth IRA” may make sense for you.

How DHJJ Financial Advisors Can Help 

Don’t let another year go by without contributing to your IRA or Roth, if you are able.  Ask your financial advisor or tax professional to assist in the specifics of your eligibility, including whether a traditional or Roth makes more sense for you should you qualify for both.

Contact your DHJJ Financial Advisor at 630-420-1360 or email Jordan at This email address is being protected from spambots. You need JavaScript enabled to view it. to discuss a strategy that fits your needs.

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Estate Planning Basics and Avoiding Probate with a Living Trust

Estate Planning Basics and Avoiding Probate with a Living Trust

One of the most important parts of the financial planning process is estate planning.  Many people mistakenly believe that estate planning is only necessary for the wealthy.  In reality, a basic estate plan is essential for everyone in order reduce uncertainty, eliminate unnecessary costs, and reduce stress for loved ones after a death.

Estate Planning Basics

The first step in the estate planning process is creating a list of your assets. Take a look at (1) what assets you have, and (2) review how your assets are titled.  Once you have this foundation laid out, ask yourself what you want to happen to your assets after you are no longer here. 

 

A basic estate plan contains a will which states where you want your property to go after your death.  Your will is filed with the courts after you pass, and the executor distributes your assets according to the terms of the will.  Using a will to distribute your assets requires that assets you held individually during your life go through probate. Here are some things you may want to know about probate:

  • What is Probate?  A legal process where the courts determine how to distribute assets titled in your name among your heirs.  Probate records are public records that anyone can access.  The process takes approximately 6 months at a minimum, often longer.
  • When does Probate apply?  Probate is often necessary in Illinois if the total value of the probate assets exceeds $100,000 or if there is any real estate.
  •    
  • Do all assets go through Probate?  No, not all assets go through probate.
    • Assets held individually with no named beneficiary will go through probate.
    • Assets that are “qualified” assets (i.e. life insurance, annuities, IRA, 401(k)) with named beneficiaries will go directly to the named beneficiary(s) and avoid probate.
    •  
    • Assets that have a Payable on Death or Transfer on Death designation will pass directly to the named beneficiary(s) and avoid probate.
    • Assets that are held jointly with rights of survivorship will go to the survivor without having to go through probate.
    •  

Estate Planning with a Living Trust

If you want to keep your wishes private and have your assets pass to the intended beneficiaries without the use of the courts, you may want to use a living trust as part of your estate plan.  Your living trust, like your will, is a document that states where you want your assets to go after you pass.  Here are some benefits of setting up a living trust:

  • Keeps assets out of the probate process and your affairs remain private.
  • A family member, friend, or corporate trustee can assist in the distribution of your assets after you pass instead of having the courts distribute your property.
  • Well-written trusts can save time, money, and hassles when it is time to distribute assets after you pass.
  • The trust functions as you during your lifetime -- there are no additional tax filing requirements while you are living.

 

Any assets you want to pass through your living trust need to be titled to the name of your trust – simply having the trust does not mean all of your assets will go through your trust.  Listing out your assets and reviewing how they are titled will ensure that your assets are part of your living trust if that is your intention.  Work with your financial advisor to review or create your estate plan to ensure your wishes are met.

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Roth IRA Conversions - 10 More Questions that Go Beyond the Basics

Last month we covered the basics of a Roth IRA conversion.  (If you missed it, Read it Here). This month we'll discuss a few more mechanics of converting along with conversion strategies to maximize tax savings. Let's get to the Q&A...

1.      First, can you provide clarity on the timing of the conversion and when it’s income for tax purposes?

Income from a Roth conversion is taxable in the year of conversion (e.g.  Income from a conversion done during the 2017 calendar year is reported on the 2017 tax return filed in 2018).

2.      The undo feature from the last Q&A sounds appealing.  Can you talk more about that? 

The technical term is recharacterize.  Let’s say you convert $20,000 of IRA to Roth in 2017. When your CPA is preparing your 2017 tax return you find out the conversion cost (tax) is 40% when you thought it would only be 25%. You decide you don’t want to pay 40%. You can recharacterize (undo) the conversion by moving the $20,000 plus related earnings (or loss) back to traditional IRA.   

3.      Related earnings?  What’s that?

If the $20,000 grows to $21,000 you have $1,000 of related earnings. If you undo the full conversion then you must move the entire $21,000 back to IRA. If you only moved $20,000 back it would’ve resulted in moving $1,000 to Roth without paying any tax (which the tax law does not allow). 

4.      Okay, I understand the mechanics. Can you fill me in on some Roth conversion strategy?

Definitely!  Multiple conversions using different investments can yield significant tax savings. Assume $60,000 is the amount of conversion you want to do in 2017.  Consider doing three separate $60,000 conversions into separate Roth conversion accounts (let’s call them Roth #1, Roth #2, and Roth #3). 

5.      Interesting.  Why would I want three separate conversions?

The three separate conversions should have different investment objectives. For example, Roth #1 could be a U.S. stock fund. Roth #2 could be a foreign stock fund.  Roth #3 could be a bond fund.  This will help to isolate an investment that outperforms from one that underperforms. 

6.      I don’t get it.  Why not combine them all into one conversion account?

You can’t cherry-pick what you want to undo from a single Roth conversion. Assume a scenario where U.S. and foreign stocks are down 20% and bonds are up 5%, you’d want to keep the bond fund (Roth #3) converted and undo #1 and #2. If everything was combined into one conversion, you would undo 2/3rd of the combined (lesser) value. 

7.      I think I got it.   Can you run through the numbers? 

Sure.  Roth #1 and Roth #2, down 20%, would be worth $48,000 each while Roth #3 (up 5%) would be worth $63,000. The total of the three conversion accounts is $159,000. You undo #1 and #2 (totaling $96,000) and put those back to traditional IRA. You are left with $63,000 in converted Roth (in #3).  Remember you pay tax on the value at conversion, which was $60,000. So, you are $3,000 ahead of the game. 

8.      I follow.  So, how is that different than if it was only in one conversion account?

With one conversion account the value would be the same $159,000. Assuming the same goal of keeping $60,000 of the original $180,000 converted, you would move 2/3rd of the value back to IRA and keep 1/3rd of the current value in Roth. That would mean $106,000 back to traditional, leaving only $53,000 in the Roth conversion. So, without the multiple conversion strategy, you would still pay tax on $60,000 but only be left with $53,000 in Roth conversion. Not a good answer. 

9.      Thanks for clearing that up. Anything else we should know? 

You can do more than three Roth conversions. Consider separate conversions for different individual stocks if that’s what you own. Or maybe you have sector funds that you can use. And don’t stop with one year. Once the next year starts up, go ahead and do some more. Remember to keep them separate, though. Don’t commingle Roth conversion assets until you know for sure that you want to keep them converted. Consider keeping a Roth conversion “home” account where you move converted values that you decide to keep. 

10.  Wow.  I didn’t realize how much could be done with Roth conversions. Any last words? 

Have fun with it. It sounds like a bit of work, but having a CPA and financial advisor that work together to execute the conversions and monitor performance to determine what to keep and what to undo makes the process seamless.  

 

If you missed part 1, here are the basics on Roth IRA Conversions.

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Trust Planning Opportunity and the 65 Day Rule

It’s not too late to take advantage of planning opportunities for certain trusts for 2016 tax filings. Irrevocable Trusts that do not require the trustee make distributions of income and principal to the beneficiaries can take advantage of the “65 Day Rule”. This Rule allows trustees to make distributions within 65 days of the new tax year and elect to treat the distribution as though it was made on the last day of the previous tax year. Taking advantage of this rule could provide significant tax savings to the trust, but the 65 days are up on March 6, 2017.

Similar to individuals, trusts are taxed via a graduated tax rate. Trusts reach the highest tax rate of 39.6% at $12,400 of taxable income compared to single individuals who reach the 39.6% tax rate at $415,050. The additional 3.8% Medicare surtax applies to investment income for trusts and individuals at these taxable income levels as well. Distributing income from the trust to a beneficiary who is not in the highest tax bracket can pull income from a high tax rate environment to a lower tax rate environment.

 

Reasons to Make a 65 Day Rule Distribution


• Gives the tax and estate planner the ability to look back at the prior year’s income and make an exact calculation to decide how much to distribute versus using estimated data at year end.
• Can pull items of income taxed at higher rates (interest, ordinary income, royalties) from the trust and distribute it to beneficiaries who may be taxed at lower rates.
• Can pull items of dividend income out of the trust where it may be taxed at a 20% rate and distribute it to beneficiaries where it may be taxed at a preferential 15% rate.
• May save on the 3.8% Medicare surtax by pulling investment income from the trust and distributing it to the beneficiaries.
• Capital gains typically cannot be distributed. Check with you tax advisor to see if this applies to your trust. If it does, further tax savings can be achieved.
 

How DHJJ Financial Advisors Can Help

Trustees should consult their tax and estate planners to determine if this is the right strategy to use for their particular trust. Trustees should also work with the trust beneficiaries to understand how the trust distributions will affect their tax posture. It’s not too late to take advantage of this opportunity. Please contact Kathy Byrne at This email address is being protected from spambots. You need JavaScript enabled to view it. '; document.write(''); document.write(addy_text70975); document.write('<\/a>'); //-->\n This email address is being protected from spambots. You need JavaScript enabled to view it. to learn more.

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10 Roth IRA Conversion Questions and Answers

Converting traditional IRA (Individual Retirement Account) funds to a Roth IRA can be a powerful tax savings opportunity. Here are some frequently asked questions on the topic:

1. What is the main difference between traditional IRA and Roth IRA? 

A traditional IRA provides tax-deferred growth. A Roth IRA offers tax-free growth.

2. What’s the tax cost of converting to Roth? 

The value of the conversion is ordinary income. The tax cost will depend on your marginal tax rate.   Some taxpayers could pay as high as 40% tax; others may pay nothing.  Many will pay a rate somewhere in between.    Work with your tax/financial advisor to watch for opportune times to convert to Roth.

3. What do you mean by “opportune times”?

Think of it as tax bracket management. If you have a lower income year and have room in a lower tax bracket, you can fill that bracket up with Roth conversion. Might you have some unused deductions?   Opportunity depends on your situation. Some retirees may benefit by converting to Roth each year before being subject to higher Medicare premiums or before required IRA distributions force them into a higher bracket. 

4. Does a Roth conversion make sense for everyone? 

No.  A general rule of thumb is comparing what tax rate you would pay today vs. tax rate in retirement.

5. Can I do a partial conversion?

Yes!  Most likely you’ll only want to convert a portion of your IRA to avoid going into higher brackets.

6.Should I request that tax be withheld on a conversion? 

No. The withholding would be treated as a distribution and would not be part of the conversion. Make estimated tax payments or adjust withholdings from other income sources to cover taxes. 

7. Can I undo a conversion? 

Yes, this is called a recharacterization, but it must be done before the extended due date of the tax return.  (i.e. October 15th of the year following the conversion)

8. Why would I want to recharacterize (undo) a conversion?

One reason to “undo” is because the value of the Roth decreased significantly (why pay tax on a $50,000 conversion that is now worth $44,000). A second reason is because the optimal amount to fill a tax bracket was less than you thought (e.g. You thought you could bring in $50,000 of income at the 15% tax rate, but it turns out you only had $25,000 of room. You can undo 50% of the conversion.)

9. Can I convert my work 401(k) to Roth 401(k)? 

Yes, you can, but your plan must allow for it. It’s very important to note that a recharacterization (“undo” option) is not available for 401(k) conversion. 

10. Is there anything else I should know?

We’ve covered the basics here and only began to touch on considerations. Next, we’ll focus on Roth conversion strategies involving multiple conversions and different investments; that and more in next month’s article.  


How Can DHJJ Financial Advisors Help?

Do you have a question about a Roth conversion?  E-mail Terry at This email address is being protected from spambots. You need JavaScript enabled to view it. ; he may include it in next month’s article.

 

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Don't Forget that the 60-day IRA Rollover Rule Has Changed

Don't Forget that the 60-day IRA Rollover Rule Has Changed

Beginning in 2015, taxpayers can only make one 60-day “indirect” IRA-to-IRA rollover per 12-month period (not based on a calendar year) regardless of the number of IRAs that you own.  Prior to 2015, many taxpayers followed Proposed Treasury Regulation Section 1.408-4(b)(4)(ii), published in 1981, and IRS Publication 590-A (“Contributions to Individual Retirement Arrangements (IRAs)”) which interpreted the limitation of one 60-day IRA rollover per 12-month period as applying on an IRA-by-IRA basis, meaning that a rollover from one IRA to another would not affect a rollover involving other IRAs of the same individual.  However, a tax court case in 2014 trumped these interpretations by ruling that you could not make a non-taxable 60-day (“indirect”) rollover from one IRA to another if you had already made a similar rollover from any of your IRAs in the preceding 12-month period (Bobrow v. Commissioner, T.C. Memo 2014-21).  As a result of this Tax Court ruling, followed up by guidance from the IRS in Announcement 2014-32 (issued on November 10, 2014), it is now crystal clear that the new rule applies in the aggregate to all IRAs.   

“Direct” IRA-to-IRA Transfer Exception

This change in the IRA Rollover rules will not apply to your ability to transfer funds “directly” from one IRA trustee to another, because this type of “direct” transfer is not considered a rollover under Revenue Ruling 78-406, 1978-2 C.B. 157).  The one-rollover-per-12 month period rule only applies to rollovers.  This is why the “direct” trustee-to-trustee transfer from one IRA to another is the preferred method of choice by financial advisers.  There is no limit on the number of “direct” trustee-to-trustee IRA transfers that can be made each year.  Therefore, in order to avoid the trap imposed by this new rule, you should instruct your current IRA trustee to directly transfer your current IRA to another IRA, without you actually receiving the money.  In essence, the check should never be made payable to you but should be made payable to the trustee of the receiving IRA.  The IRS has clarified that a check made payable from one IRA custodian to another IRA custodian will count as a direct transfer even if the check is mailed to you (i.e., “in your hands”).     

Rollover from a Traditional IRA to a Roth IRA (“Conversion”) Exception

While the new rule applies to “indirect” rollovers between two traditional IRAs and between two Roth IRAs, it does not apply to rollovers from a traditional IRA to a Roth IRA.  Therefore, you can still make an unlimited amount of “Roth Conversions”.

Rollover from a Qualified Retirement Plan to an IRA Exception

The new rule also does not apply to a rollover from a qualified retirement plan (i.e., 401(k) plan) to an IRA.  Therefore, you can still make an unlimited amount of these types of rollovers during a 12-month period.

If you have any questions on how to handle the rollover of an IRA account, a Roth IRA account, or a qualified retirement plan to an IRA account, please contact your financial adviser before they initiate the rollover.  If you make a mistake regarding this new 60-day rollover rule on “indirect” rollovers, you cannot reverse your error and the mistake can be very costly.  Therefore, it is best to seek professional advice before you attempt the rollover. 

 
 
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529 Plans: Common Questions and Answers – And Potential Tax Savings

529 Plans: Common Questions and Answers – And Potential Tax Savings

What is a 529 Plan?

These plans are named after Section 529 of the federal tax code. The 529 plans are a great vehicle to save money and let it grow tax-free. The requirements for guaranteeing the tax free growth are simple – use the money in the 529 plan for qualified education expenses.

What tax benefits and implications are there to a 529 Plan?

529 plans are a great way to accumulate wealth for future generations to use towards education and have that wealth grow income tax free and also estate tax free if used in the proper way.

A contribution to a 529 plan is considered a gift to the beneficiary of the plan. There may be gift tax reporting requirements and gift tax consequences if you give more than $14,000 to any particular beneficiary during the year.

There are limits on the amount that can be contributed into a 529 plan. These limits are generally between $300,000 and $400,000, depending on the state sponsoring the plan.

You can use any state 529 plan. You are not required to use the plan of your resident state; however there may be tax benefits if you use your resident state 529 Plan. Illinois allows for a subtraction of the contribution amount up to $20,000, if your filing status is married filing joint.

What are the “qualified education expenses?”

Qualified education expenses can be a variety of things. They include tuition, fees, book, and room and board. A beneficiary can even use them to purchase a computer so long as they are enrolled in an eligible educational institution.

Who can get a 529 Plan?

Anyone can set up a 529 plan. There are no income limitations on who qualifies to set up a 529 plan. The beneficiary can be anyone as well – a child, grandchild, relative, friend, and even yourself.

An eligible educational institution is generally any university, college, or vocational school that is attended as postsecondary education. If you are curious if your institution qualifies, there are websites that list all qualified institutions (http://ope.ed.gov/accreditation/).

How DHJJ Can Help

If you have questions on how your 529 Plan impacts your taxes, please contact DHJJ at 630-420-1360, or email Cammy Corso at ccorso.dhjj.com.

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Estate Planning: Take Advantage of Potential Valuation Discounts

Estate Planning: Take Advantage of Potential Valuation Discounts

Have you considered making gifts or selling interests of your family limited partnership as part of your overall estate plan? If you are considering making these types of transfers to family members and/or trusts for the benefit of family members, this could be the ideal time to act in order to take advantage of potential valuation discounts currently available. The IRS is speculated to issue new guidance this fall that could negatively impact the way in which these interests are valued from an estate and gift perspective.

Estate Planning Tools

  • Family limited partnerships (FLPs) and limited liability companies (LLCs) are often created by parents who are looking to:
  • Accumulate their wealth for the benefit of their family
  • Consolidate assets
  • Provide asset protection to younger generations
  • Provide the younger generations with hands on-education in investment and income tax planning while still keeping overall control of the assets
  • Transfer wealth from one generation to another at a discounted value

Parents establish a FLP or LLC by transferring their own assets to the entity. The parents retain the controlling interests in the family entity and gift the non-controlling interests to their children, or trusts for the benefit of their children, via annual or lump-sum gifting. If structured correctly, these gifts can qualify for the annual exclusion, which currently allows you to give $14,000 to as many individuals as you wish during the calendar year.

Current Discounts

Two discounts are generally available when determining the value of the closely held family entity interests: a lack of marketability discount and a minority discount:

  1. A “Lack of Control” or “Minority Interest” Discount reflects the limited partners’ (or non-controlling member in the case of the LLC) inability to make key business and management decisions with regards to the family entity.
  2. A Lack of Marketability Discount reflects the fact that the sale or transfer of the closely held family interests is so restricted that a ready market for those interests often times doesn’t exist as it would with publicly traded assets.

Upcoming IRS Regulations Could Limit Discounts

As previously mentioned, the IRS is rumored to be issuing proposed regulations late summer/early fall that may significantly limit these discounts when valuing a closely held family entity. Actual operating companies may be exempted from the new rules; however entities that predominately hold portfolio type investments will likely be subject to these changes.

If you are considering making a gift of any type of closely-held family entity as part of your overall estate or succession plan, please contact your DHJJ tax advisor today to discuss next steps.

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Trust Planning Opportunity and the 65 Day Rule

Trust Planning Opportunity and the 65 Day Rule

For whom: Trustees and their beneficiaries

It’s not too late to take advantage of planning opportunities for certain trusts for 2015 tax filings. Irrevocable Trusts that do not require the trustee to make distributions of income to the beneficiaries can take advantage of the “65 Day Rule”. This Rule allows trustees to make distributions within 65 days of the new tax year and then elect to treat the distribution as though it was made on the last day of the previous tax year. Taking advantage of this rule could provide significant tax savings to the trust, but the 65 days are up on March 5, 2016.

Similar to individuals, trusts are taxed via a graduated tax rate. Trusts reach the highest tax rate of 39.6% at $12,300 of taxable income compared to single individuals who reach the 39.6% tax rate at $413,200. The additional 3.8% Medicare surtax applies to investment income for trusts and individuals at these taxable income levels as well. Distributing income from the trust to a beneficiary who is not in the highest tax bracket can pull income from a high tax rate environment to a lower tax rate environment.

Reasons to Consider a 65 Day Rule Distribution

  • Gives the tax and estate planner the ability to look back at the prior year’s income and make an exact calculation to decide how much to distribute versus using estimated data at year end.
  • Can pull items of income taxed at higher rates (interest, ordinary income, royalties) from the trust and distribute it to beneficiaries who may be taxed at lower rates.
  • Can pull items of dividend income out of the trust where it may be taxed at a 20% rate and distribute it to beneficiaries where it may be taxed at a preferential 15% rate or 0% rate for certain taxpayers.
  • May save on the 3.8% Medicare surtax by pulling investment income from the trust and distributing it to the beneficiaries.
  • Capital gains typically cannot be distributed. Check with you tax advisor to see if this applies to your trust. If it does, further tax savings can be achieved.

Trustees should consult their tax and estate planners to determine if this is the right strategy to use for their particular trust. Trustees should also work with the trust beneficiaries to understand how the trust distributions will affect their tax posture. 

How DHJJ Financial Advisors Can Help   It’s not too late to take advantage of this opportunity. Please contact DHJJ Financial Advisors at 630-420-1360 or email Kathy Byrne at This email address is being protected from spambots. You need JavaScript enabled to view it.  to learn more.

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Long-Term Care Insurance: Yes or No?

Long-Term Care Insurance: Yes or No?

According to Genworth Financial, a major issuer of long-term care insurance policies, a private room in a nursing home averages $92,378 ($253/day) in 2016 while a home health aide, who works under the supervision of a registered nurse or therapist to assist with daily routines such as bathing, grooming, dressing, and medication reminders, averages $46,332 ($127/day) in 2016. As astronomical as these costs appear now, they are only going to get larger as baby boomers age and the demand for this care grows. Over the past 5 years (2012-2016), the annual cost for a private room in a nursing home has averaged a 4% increase per year. Based on a current annual average cost of $92,378 in 2016, a 3-year stay in a private room of a nursing home would cost a whopping $277,134, assuming that prices don’t continue rising. Contrary to popular belief, Medicare and other forms of health insurance do not cover these health care expenses because long-term care is not considered a medical expense. Therefore, unless you are confident that you can pay for this care yourself, you may want to consider purchasing some form of long-term care insurance (LTCI).

 

Premium Costs May Increase

When it comes to long-term care insurance, the biggest dilemma facing the average consumer is that the cost of LTCI is almost as shocking as the cost of a nursing home stay. A typical policy taken out by an Illinois couple in their early-50s can initially cost around $3,100 in annual premiums for the two of them. While premium increases for LTCI policies do not occur regularly or often, when they do, they can sometimes increase dramatically with rates known to increase from 30-60% in one fell swoop. The reason that insurance premiums on LTCI policies do not increase on an annual basis is that in order to increase the premium on a LTCI policy, the insurance company must present its case for the increase to a state’s Department of Insurance and request a premium increase for an entire “class” of policies, such as “all policies issued to people 50-54 years of age in the year 2005”. If you happen to fall into that “class” of policyholders for that age bracket and that year in that state, then your premium may be increased. You may wonder why a state insurance department would ever approve a premium increase on a LTCI policy. Shouldn’t an insurance company have to stand by the policy that it originally wrote for a policyholder? The reason is that, in certain situations where the current premiums collected by the insurance company are too far below the anticipated claims to be paid out to policyholders, there’s a significant risk that the insurance company could be rendered insolvent and unable to pay all of the claims to policyholders without an increase to the current premium of the LTCI policy. The underlying conclusion reached by the state’s Department of Insurance is that it’s better to have a premium increase to ensure all claims made by policyholders are paid than to keep the premiums in place at the risk of the insurance company going bankrupt.

 

Will you Ever File a Claim?

Two deterrents that often cause people to not purchase LTCI are the high premium cost of the insurance and the thought that they will never use it (i.e., file a claim). According to Limra, an insurance-industry research firm, only about 8 million people have some form of long-term care insurance coverage, and sales have been declining because of the news over the past 2-3 years about large rate increases in premiums. Experts in the LTCI industry believe that part of the problem is the widespread denial by consumers that they will ever need the care (i.e., will never file a claim). If you are currently in your mid-50’s and in good health, it’s hard to imagine that one day (possibly 30 years from now) you will be too frail and unable to take care of yourself. In addition, you may believe that your children (or spouse) will step in and take care of you when, and if, the need arises for long-term care. However, your children (or spouse) may not have the time or the technical expertise to provide the level of health care that you may need. As Americans continue to live longer, it is forecasted that the need for long-term care is only going to grow.

You may never need long-term care. But, according to America’s Health Insurance Plans (AHIP), a national association representing nearly 1,300 members providing health benefits to more than 200 million Americans, about 19% of Americans aged 65 and older experience some degree of chronic physical impairment. Among those 85 or older, the proportion of people who are impaired and require long-term care is about 55%. Therefore, as the American population grows older, the odds of entering a nursing home, and staying for longer periods, increases. According to the U.S. Department of Health & Human Services, the likelihood that the average American turning 65 will need some form of long-term care is estimated to be about 70%.

 

Should you “self-insure” against the Risk of needing Long-Term Care?

A number of financial planners favor the method of “self-insuring” because, in part, they lack faith in LTCI products, but also because they believe that if you put the money that you would have paid in premiums into a diversified 60% equities/40% fixed income portfolio, you can create your own pool of funds to draw on down the road for long-term care, if need be. There is a good chance that a diversified portfolio, compounded over 25-30 years, will yield sufficient funds to pay for most of an average person’s care. Additionally, under this scenario, if you end up not needing these funds for long-term care, they will pass along to your heirs when you pass away rather than going to the insurance company in the form of premium payments. However, this rationale can only work if you have the discipline to invest the money that you would have spent on premium payments and whether your returns on your investments will keep pace with health care inflation, which has significantly outpaced general inflation for years. Therefore, you may want to employ a form of “forced discipline” by purchasing a LTCI policy. A good LTCI policy may also protect you against the rapid pace of health care inflation.

As you can see, the decision to purchase a LTCI policy is not an easy one. There are many pros and cons as to whether you should “self-insure” or purchase long-term care insurance. If we had a crystal ball and could look 25-30 years into the future, the decision would be easy, but we don’t. Therefore, all we can do is analyze our own situation and try to reach a conclusion as to whether long-term care insurance is appropriate for us given our own individual scenario.

How DHJJ Financial Advisors Can Help If you have questions on Long Term Care Insurance and how it may play a part in your future financial planning, please contact DHJJ Financial Advisors at 630-420-1360 or email Paul Minta at This email address is being protected from spambots. You need JavaScript enabled to view it.

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