Understanding the Differences Between a Will and a Trust

October 28, 2009

Everyone has heard the terms “will” and “trust,” but not everyone knows the differences between the two. Both are useful estate planning devices that serve different purposes, and both can work together to create a complete estate plan.

One main difference between a will and a trust is that a will goes into effect only after you die, while a trust takes effect as soon as you create it. A will is a document that directs who will receive your property at your death and it appoints a legal representative to carry out your wishes. By contrast, a trust can be used to begin distributing property before death, at death or afterwards. A trust is a legal arrangement through which one person (or an institution, such as a bank or law firm), called a “trustee,” holds legal title to property for another person, called a “beneficiary.” A trust usually has two types of beneficiaries one set that receives income from the trust during their lives and another set that receives whatever is left over after the first set of beneficiaries dies.

A will covers any property that is only in your name when you die. It does not cover property held in joint tenancy or in a trust. A trust, on the other hand, covers only property that has been transferred to the trust. In order for property to be included in a trust, it must be put in the name of the trust.

Another difference between a will and a trust is that a will passes through probate. That means a court oversees the administration of the will and ensures the will is valid and the property gets distributed the way the deceased wanted. A trust passes outside of probate, so a court does not need to oversee the process, which can save time and money. Unlike a will, which becomes part of the public record, a trust can remain private.

Wills and trusts each have their advantages and disadvantages. For example, a will allows you to name a guardian for children and to specify funeral arrangements, while a trust does not. On the other hand, a trust can be used to plan for disability or to provide savings on taxes.  To discuss how you can best use a will and a trust in your estate plan, please email the Elder Law Center or call 630-844-0065.

The Elder Law Center is located in Aurora, IL, Kane County, in the Chicago Western Suburbs.

Medicare Part B Premiums to Rise 15 Percent for Some, or Maybe None

October 23, 2009

After not rising last year, the basic premium for Medicare Part B will shoot up 15 percent to $110.50 a month in 2010 from $96.40 in 2008 and 2009. But most beneficiaries will be exempted from paying this increase. Whether the rest will be able to avoid it as well remains to be seen.

The explanation is somewhat complicated. It all started when the Social Security Administration announced that there would be no cost of living benefit rise for Social Security recipients in 2010. A “hold-harmless” provision in the Medicare law prohibits Part B premiums from rising more than that year’s cost of living increase in Social Security benefits. Since there is no Social Security increase, most beneficiaries — 73 percent — will not have to pay any increased Part B premiums because of the hold-harmless provision. Those covered by the provision will continue to pay Part B premiums of $96.40 per month in 2010.

But this hold-harmless protection does not apply to the other 27 percent of beneficiaries — about 12 million in all — who either:

  • do not have their Part B premiums withheld from their Social Security checks, or
  • pay a higher Part B premium surcharge based on high income (see below), or
  • are newly enrolled in Part B.

The U.S. House of Representatives overwhelmingly passed a bill that would void the 15 percent Part B premium increase for all Medicare beneficiaries, and it awaits action in the Senate. The Obama administration has urged the Senate to go along with the House.

Medicare Part B covers physician services as well as qualifying out-patient hospital care, durable medical equipment, and certain home health services, among other services. But whether or not Congress keeps the cost of Medicare Part B level for all, other beneficiary costs of the Medicare program are scheduled to rise next year. Here are all the new Medicare figures for 2010:

  • Basic Part B premium: $110.50/month
  • Part B deductible: $155 (was $135)
  • Part A deductible: $1,100 (was $1,068)
  • Co-payment for hospital stay days 61-90: $275/day (was $267)
  • Co-payment for hospital stay days 91 and beyond: $550/day (was $534)
  • Skilled nursing facility co-payment, days 21-100: $137.50/day (was $133.50)

As directed by the 2003 Medicare law, higher-income beneficiaries will pay higher Part B premiums. Following are those amounts for 2010:

  • Individuals with annual incomes between $85,000 and $107,000 and married couples with annual incomes between $170,000 and $214,000 will pay a monthly premium of $154.70.
  • Individuals with annual incomes between $107,000 and $160,000 and married couples with annual incomes between $214,000 and $320,000 will pay a monthly premium of $221.
  • Individuals with annual incomes between $160,000 and $214,000 and married couples with annual incomes between $320,000 and $428,000 will pay a monthly premium of $287.30.
  • Individuals with annual incomes of $214,000 or more and married couples with annual incomes of $428,000 or more will pay a monthly premium of $353.60.

Rates differ for beneficiaries who are married but file a separate tax return from their spouse:

  • Those with incomes between $85,000 and $128,000 will pay a monthly premium of $287.30.
  • Those with incomes greater than $128,000 will pay a monthly premium of $353.60.

The Social Security Administration uses the income reported two years ago to determine a Part B beneficiary’s premiums. So the income reported on a 2008 tax return is used to determine the monthly Part B premium in 2010. Income is calculated by taking a senior’s adjusted gross income and adding back in some normally excluded income, such as tax-exempt interest, U.S. savings bond interest used to pay tuition, and certain income from foreign sources. This is called modified adjusted gross income (MAGI). If a senior’s MAGI decreased significantly in the past two years, she may request that information from more recent years be used to calculate the premium. But, as noted above, all this may be academic for 2010 if Congress acts to hold down Part B premiums for all beneficiaries.

For more information from Medicare on the 2010 increases, click here.

Online Retirement Planning Calculators Measure Risk Poorly, Study Finds

October 15, 2009

If you are retired or are nearing retirement, the main questions on your mind are probably “Will I run out of money in retirement?” and “Will I be able to maintain my standard of living?” For answers, people often turn to free online retirement calculators, such as those listed on ElderLawAnswers’ Calculators page, that calculate how much users will need to save to achieve their retirement objectives, based on details about their finances.

But how well do these calculators account for the inherent risks in retirement, such as how long you will live, how your investments will perform, what the inflation rate will be, and health care and long-term care costs? Not very well, according to a new study by the Pension Research Council.

“We conclude,” the study’s authors write, “that on the whole, the tools do not highlight nor address retirement risk particularly well; rather, they mainly mask risk.”

The authors, retirement experts Anna M. Rappaport and John A. Turner, reviewed the available research on five leading Web-based calculators to see how they handle post-retirement risks. The calculators they looked at were Fidelity’s Retirement Income Planner, AARP’s retirement planning calculator, MetLife’s calculator, the U.S. Department of Labor’s calculator and T. Rowe Price’s Retirement Income Calculator.

In their working paper “How Does Retirement Planning Software Handle Post-Retirement Realities?” Rappaport and Turner conclude that while the calculators “can provide a rough idea of whether the user is on target for retirement,” all inadequately assess the risk of running out of money.

For example, one calculator determines income sufficiency based on average life expectancy and overlooks the very real chances of living longer than the average. Another assumes that everyone, even if not married, receives the same Social Security benefits. Several do not permit calculations to take spouses into account. Among the authors’ other findings:

  • None of the consumer calculators they evaluated treat inflation as a risk, instead assuming that inflation is constant over the retirement period analyzed.
  • None treated expected medical and long-term care expenses as a risk factor or alerted users to the potentially huge impact such expenses could have on retirement plans.
  • Few have checks on inconsistent or outlandish assumptions. For example, many programs permit the user to specify long-term risk-free rates of return of 10 or even 20 percent.
  • Some calculators do not ask users to indicate expected inheritances or other one-time receipts of assets, and some do not include the value of housing as a source of retirement income.
  • Several of the programs ignore taxes, leading users to conclude that they have more retirement resources than they actually do.
  • The calculators cannot take account of extreme events such as the recent financial crisis, in which housing values have fallen and mortgage rates have risen — at the same time that people are losing jobs.

The authors note that “consumers or financial professionals working with them could benefit from trying alternative programs and scenarios within each program.”

The study also looked at retirement planning software for financial planning professionals. The authors concluded that while these tools are more complex than their consumer counterparts, they still contain flaws.

To read the Pension Research Council’s working paper “How Does Retirement Planning Software Handle Post-Retirement Realities?” click here. (Free sign-up required.)