By Ryan Beadle
The Medicare Prescription Drug, Improvement, and Modernization Act of 2003 added health savings accounts (HSAs) to the Code effective for taxable years beginning after December 31, 2003. The rules for inheriting an HSA are different than for IRAs and other tax-deferred retirement accounts, and therefore may be unfamiliar to many given that HSAs are a relatively new concept and very few have been inherited. Under §223(f)(8)(B)(i) of the Internal Revenue Code:

If the HSA account owner’s surviving spouse is the designated beneficiary of the HSA, §223(f)(8)(A) specifies that the HSA becomes the HSA of the surviving spouse and is excluded from income. This is similar to a spousal rollover of an IRA or other tax-deferred retirement account. No other “rollover” is permitted for HSAs.

If the account is acquired by the owner’s estate, the HSA ceases to be an HSA at the account owner’s death, and the account’s value must be included in the account owner’s income for his or her last taxable year.

If the account is acquired by anyone other than the owner’s surviving spouse or estate, then the HSA ceases to be an HSA at the account owner’s death, and the person acquiring the HSA must include the fair market value of the HSA as of the date of death in income in the taxable year that includes the date of the account owner’s death.

There is a provision to reduce the includible income by the deceased HSA account owner’s qualified medical expenses paid by the HSA recipient (other than the spouse or estate) within one year after the account owner’s death. There is also a provision allowing a deduction for increased estate taxes attributable to an item which is also taxable income. §223(f)(8)(B)(ii).

This is a different rule than for an IRA or other tax-deferred retirement account of which the estate is the beneficiary—for retirement accounts, normally the estate includes the item of income on its tax return, and the estate passes that income, and the tax obligation, out to the beneficiaries of the estate, thus taxing the income at the beneficiary’s (usually) lower rates, depending on how many beneficiaries there are and what their marginal income tax rates are.

by Ryan Beadle

Most taxpayers know that contributions to a tax-deferred retirement account will be taxable income when withdrawn.  However, until January 1, 2010, individuals 70½ and older who make a qualified charitable distribution of up to $100,000 from a traditional IRA will not include the distribution in taxable income.  Married individuals filing jointly may exclude distributions up to $200,000 from income, $100,000 per individual IRA owner.  IRC §408(d)(8)(A).

Such distributions are not taken into account for charitable deduction purposes; that is, the taxpayer cannot claim the contribution as an itemized deduction (No double dipping!).  Most importantly, the distribution must be made by the IRA trustee directly to a charitable organization as described in IRC §170(b)(1)(A) (i.e., 50-percent organizations).

by Ryan Beadle

The Wall Street Journal reported today that the IRS will expand a program that searches for inconsistencies between mortgage payments and income.

                Under the document matching program, the IRS matches forms it is provided for consistency in income reporting.  The most familiar example may be matching an employer-provided Form W-2, with the worker’s Form 1040, to verify the amount of income.

                Each year, a third party lender that collects mortgage interest files Form 1098 with the IRS, reporting the receipt of interest income.  In theory, if a taxpayer paid mortgage interest, he or she should have had income available to pay it.  Based on that assumption, the IRS has routinely checked filed Forms 1098 to identify nonfilers.

                Now, the IRS indicated it will begin to match the amount of interest paid, as shown on Form 1098, with the amount of income reported on Form 1040, to identify possible underreporting of income.

                The IRS believes this may be a good source of information regarding workers that are paid in cash and underreport their income.

                At the same time, many individuals may have lost jobs and dipped into savings in order to continue making their mortgage payments.  That group may include both high net worth families and struggling families.  Their Forms 1040 will not reflect additional income, so the IRS’s Document Matching Program may trigger a “false positive.”

                This serves as a good reminder to every taxpayer to keep accurate and detailed financial records for all information submitted on tax filings with the IRS, in case of an audit.  Given that this is a fresh issue that the IRS has only indicated it will move ahead on, we do not yet know what the IRS will ask a taxpayer to produce in his or her defense.  A good start may be for taxpayers to keep records, as best they can, which show the flow of money from legitimate sources to pay the interest on their mortgages.

by Ryan Beadle

A recent survey indicated that about 55% of adult Americans do not have a will. There may be many reasons for this, but a few of the most popular from the survey were:

1. People don’t believe they have enough wealth to be concerned about planning an estate (24%);
2. People don’t want to contemplate their own mortality (10%);
3. People don’t know who to talk to about wills (9%).

Generally, most believe that estate planning is for two groups: seniors and the wealthy.

It is understandable that death is a gloomy subject. But estate planning is definitely not just for seniors, and it is not just for the super-rich in terms of dollars and cents. There is real value in knowing that your children will be cared for if you can’t. The young, especially with young children, should have just as much incentive, if not more, to plan their estates as anyone else.

In the context of a young family, a will is indispensible in order to accomplish two objectives. First, a parent, through the will, should nominate a guardian, or a line of succession of guardians, in the event the children need one. The alternative to a parent nominating a guardian through a will is for the court to decide who should be guardian—greatly elevating the chances of a family fight over the issue.

Second, a will should ensure that a child younger than 18 does not directly inherit property. If a child is the beneficiary of an estate, and the child directly receives property in excess of $1,500 (each state has its own amount, and that happens to be North Carolina’s amount), the court may appoint a guardian to handle the money for the child until the child turns 18. Guardianships for finances require court oversight, which dissipates the child’s property. Also, at age 18, the child will own the property outright, at a time when the child may not be responsible enough to wisely control even a small amount of property. One sentence in a will can prevent the need for a guardianship for the child’s finances—a sentence that says that any amount given to a child beneficiary may be held in a custodial or trust account for the benefit of the child.

by Diana Armatage Johnston
As seen in Exceptional Parent Magazine: The Family and Professional Journal for the Specials Needs Alliance
Vol 38, Issue 07, July 2008 2008

When your clients seem to know more than you do about services for their special-needs children, you listen hard to what they have to say. You hear stories of 3-year waiting lists, unwritten rules that seem to change monthly, and the arbitrary loss of essential benefits for reasons clients do not understand. You hear questions about why one family gets all-day help, while your client’s child gets none. When you ask your client the name of the program that has denied assistance the answer is often, “I don’t know.”
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by Diana Armatage Johnston
As seen in Exceptional Parent Magazine: The Family and Professional Journal for the Specials Needs Alliance
Vol 38, Issue 04, April 2008

When parents and their legal counsel have determined that a special needs trust is the best way to preserve means-tested government benefits like Supplemental Security Income (SSI) and Medicaid for their child, they still have some important matters to decide: Who should administer the trust as trustee? Who should monitor the trustee’s performance? Who should advise the trustee about their child’s special needs? There is no single right answer to these questions because the best choices depend on a wide variety of factors and the realities of each family’s situation. This article will attempt to help parents make the best choices for their child. Because a special needs trust must be carefully drafted and administered with great skill, one person or institution rarely has all the skills needed to do the job. Choosing a team to administer a special needs trust may often be the best approach.

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