Noteworthy Changes to Coverdell Accounts Demand Consideration

Families interested in opening a Coverdell Education Savings Account this year for college savings should consider doing so before April 15. That would allow them to invest as much as $4,000 in one of these tax-advantaged accounts this year—twice the maximum for annual contributions—since money deposited before April 15 can be counted against the previous year's limit.

But families planning to use a Coverdell account to pay for pre-college education expenses should think twice about opening or contributing to an account this year. Starting next year, withdrawals from Coverdells to pay expenses from kindergarten through 12th grade will no longer be tax-free, unless Congress acts to extend that benefit, which is far from certain.

Another prospective rule change would lower the limit on annual contributions to $500 starting next year, making Coverdells less useful for college savings. Already, the $2,000 limit has made Coverdells much less popular than 529 college-savings plans, which offer similar tax benefits for college costs and a roughly $300,000 limit on contributions overall. But even some people who are putting away more than $2,000 a year for college have included Coverdells in their savings plans, because Coverdells offer a greater range of investment options than 529 plans, and more freedom to switch investments.

Another benefit that could expire at year's end is the ability of an investor to claim a Hope or Lifetime Learning tax credit for education in the same year they use Coverdell funds, as long as the tax credit and Coverdell money aren't used for the same expense. For example, an investor can take a tax credit for tuition in the same year s/he is using Coverdell money for books.  This benefit is scheduled to sunset at the end of this year,  resulting in the two tax benefits becoming mutually exclusive. 

Avoiding Sham Trusts and Trust Scams: Part I - Sham Trusts

Legitimate trusts are tools used by qualified estate planners and their clients to achieve certain objectives, including, but certainly not limited to, controlling the disposition of assets, avoiding probate, reducing administration costs, saving estate taxes, and preserving family wealth for future generations. Unfortunately, trusts are often used for improper purposes. Lurking in the shadows are con artists who promote sham trusts and trust scams for their own gain. These con artists rely on the ignorance of the public, and only education and information can prepare you for their pitch.

Sham trusts and trust scams are usually sold at high pressure seminars, by door-to-door salesmen, and on the internet. In some cases, they are recommended by well meaning but poorly informed CPA's, financial advisors, friends, or business acquaintances. The marketing techniques can be persuasive, and are aimed at all classes of people.

What is a Sham Trust?

A sham trust is any trust created for an improper or illegal purpose. For example, "trusts" or "contracts" which purport to avoid, or significantly reduce, all taxes, including all income taxes, for individuals and, in some cases, businesses, are almost always sham trusts. These often use a complex structure that involves the "irrevocable" transfer of your assets to one or more business or trust entities which you control. The promoters claim that the arrangement will significantly reduce or eliminate state and federal income taxes.

Although there are legitimate estate tax objectives that may be accomplished with trust planning, income tax planning is quite a different matter. Generally speaking, someone is going to have to report taxable income, as well as pay income taxes thereon. While there are legitimate credits, deductions, and exemptions available under state and federal law, there is no trust or business entity into which you can convey all of your property and thereby avoid all income taxes. These trusts sometimes come with seductive names. Moreover, when the justification for the trust somehow involves the unconstitutionality of the IRS or of income taxes, you are best advised to seek additional or alternate legal counsel.

Avoiding Sham Trusts and Trust Scams - Part II - Trust Scams

Although trusts are excellent tools used by legitimate professionals to accomplish a variety of worthwhile objectives, there are a wide variety of con artists who prey upon the public using the lure of trust planning. These con artists rely on the ignorance of the public. They generally provide poorly conceived and implemented estate plans, poor service, and often do more harm than good to their customers. These schemes are usually encountered at high pressure seminars.

What is a Trust Scheme?

Several years ago, the Supreme Court for the State of Ohio fined a company and a group of individuals including several attorneys one million dollars for selling unnecessary and potentially damaging legal services to seniors. Several years later, the State of Ohio fined a pre-paid insurance company and a group of attorneys for similarly cheating seniors. The State of Texas is currently investigating a Ponzi scheme in which seniors are alleged to have lost tens of millions of dollars. What these schemes have in common is that each involved the marketing and sale of living trusts.

Living trusts are so advantageous and so readily accepted by the general public that scam artist will often sell a living trust as a front for selling some other illegitimate scheme or investment. Once confidence of the public is attained, the sham artist will sell the client stock in companies that do no exist, unregistered and risky securities, poorly capitalized limited partnership interests, and just about any fraudulent investment or business scheme imaginable. Promising returns that are usually too good to be true, the scam artist assures their clients that the investment is safe. The scam artist is almost never an attorney, and the trust is almost always incidental to their "product." Moreover, the investments that they offer are almost always unwise.

Most Do Not Have Advanced Directives

"Five years after the court fight over allowing Terri Schiavo to die, most Americans still don't draft the legal documents that spell out how far caregivers should go to keep them alive artificially."  This according to an Associated Press article published in the Washington Post.  According to the article:

"Schiavo's life and death captivated the country and fueled conversations about the necessity of the documents, known as advance directives or living wills. Even though millions witnessed a worse-case scenario, there's no indication it had a lasting impact on getting more people to make their wishes known."

"The gap is so big," Paul Malley, president of Aging With Dignity, is quoted as saying.  Aging With Dignity  advocates advance directives and saw an increase in interest during the Schiavo case. "Even a significant impact from the Schiavo case doesn't put a dent in the need that's out there."

Underwriting Ceases on National Flood Insurance

FOR IMMEDIATE RELEASE
FROM THE OHIO DEPARTMENT OF INSURANCE

Monday, March 29, 2010

CONSUMER ADVISORY:

National Flood Insurance Program Not Issuing New Policies

COLUMBUS — Ohio Department of Insurance Director Mary Jo Hudson is advising consumers that the National Flood Insurance Program (NFIP) ceased issuing new policies or renewing policies to cover flood damage, following the expiration of the program’s federal authorization at midnight March 28, 2010. Congress will not act again on reauthorization legislation until after it returns to session on April 12.

The NFIP sunset could cause short-term problems for consumers waiting to close on the sale of a property within a Special Flood Hazard Area. However, consumers with current policies are still covered by the federal program. Only those seeking to purchase a policy during this time will be affected. Until Congress approves this reauthorization, the NFIP cannot issue new policies, increase coverage or approve renewal policies.

National Healthcare Decisions Day is April 16

National Healthcare Decisions Day is April 16th! On this day, all across the country, health care facilities, health care professionals, chaplains, the legal community, and others will be participating in a collective effort to highlight the importance of making advance health care decisions and to provide tools for decision-making..

Notwithstanding a much higher awareness on the part of individuals and institutions regarding the need for health care decisions planning, implementation by individuals and institutions of plans meeting the need are still rare.   Less than fifty percent of the severely or terminally ill patients  had an advance directive in their medical record, according to a study by the  U.S. Agency for Healthcare Research and Quality (http://www.ahrq.gov/).   In a 2003 article, “Advance Care Planning: Preferences for Care at the End of Life,” USAHRQ reported that only twelve percent of patients with an advance directive had received input from their physician in its development.  Moreover, between sixty-five and seventy-six percent of physicians whose patients had an advance directive were not aware that it existed. 

Even when the advanced directive exists, and the physician is aware of its existence, most physicians do not consult with their patients regarding end-of-life issues until treatments have been exhausted, at least according to researchers publishing a report in the journal Cancer, reported last month in this blog (click here).  According to the researchers, most doctors don't talk about end-of-life issues with their cancer patients when those patients are feeling well. Nor do they talk about them until treatments have been exhausted. Those delays might mean patients are unable able to make truly informed choices early in their treatment.

Annuity Tax Remains in Health Care Reform

By Steven A. Morelli, Senior Editor, InsuranceNewsNet

Despite protests from insurance groups, the health care reconciliation act will add a new tax on annuity income to pay for Medicare once the bill becomes law.

Several insurance groups issueda last-minute appeal in a letter to legislators on Wednesday to exempt annuities from the new tax, citing the important growing role annuities are playing in securing retirement. But annuitiesremained in the reconciliation bill the Senate and House passed on Thursday and sent to President Barack Obama to sign.

The 3.8 percent tax applies to investment income from married individuals filing a joint return and surviving spouses with taxable income of at least $250,000; married taxpayers filing separately with an income of $125,000; and other individuals, with an income of $200,000.

The bill lists annuities as investment income. The tax would apply to annuity income that is already taxable (the amount above the annuity owner’s cost basis), starting in 2013. Annuities sold in employer-sponsored retirement plans would be exempt.

Ohio Increases Annuity Guaranty Coverage

Ohio Department of Insurance Director Mary Jo Hudson has announced that a recent amendment to Ohio insurance law by the Ohio General Assembly has increased The Ohio Life and Health Insurance Guaranty Association’s coverage protection for annuities from $100,000 to $250,000. The change goes into effect on May 26th, 2010.

The new changes to the law (Section 3956.04 of the Ohio Revised Code) will guarantee that consumers who purchase an annuity product may be able to recover up to $250,000 of their policy in the unlikely event that the company they purchased the product from becomes insolvent.

The Ohio Life & Health Insurance Guaranty Association (OLHIGA) is a non-profit association of insurance companies that sell life insurance, health insurance, and annuities in Ohio. It was created by Ohio law to provide some level of protection for certain Ohio policyholders against the insolvency of an insurance company licensed to sell those types of policies in Ohio in the event that the company is placed into liquidation.

Planners' Corner- Health Care Reform and LTCI

The health bill package includes provisions that could impact long term care insurance sales.  President Obama signed into law the giant Patient Protection and Affordable Care Act that the Senate passed early on Christmas Eve, 2009.  The new law includes the Community Living Assistance Services and Supports Act (CLASS).  The CLASS Act is intended to provide a lifetime cash benefit that offers people with disabilities some protection against the costs of paying for long term services and supports, and helps them remain in their homes and communities.  It is a self-funded, insurance program with enrollment for people who are currently employed. Premiums will be paid through payroll deductions if an individual’s employer decides to participate in the program. Participation by workers is entirely voluntary. Self-employed people or those whose employers do not offer the benefit will also be able to join the CLASS program through a government payment mechanism. 

Under CLASS, individuals qualify to receive benefits when they need help with certain activities of daily living, have paid premiums for five years, and have worked at least three of those five years.  Qualified individuals will a receive a lifetime cash benefit based on the degree of impairment, which is expected to average between $50 and $75 a day or more than $27,000 per year.  This benefit can be used to maintain independence at home or in the community, and should be sufficient to cover typical costs of home care services or adult day care. The qualified individual's benefits can also be used to offset the costs of assisted living and nursing home care.

Many experts, including actuaries at the government's own Centers for Medicare and Medicaid Services, have argued that a combination of relatively rich benefits and the opt-out provision make the program actuarially unsound, by encouraging workers with health problems to flock to the program and healthy young workers to opt out.  Of course, it is possible that the provisions of CLASS will be amended by the reconciliation bill currently under consideration by the Senate.  

Beware Fake Health Care Plans In Wake of Reform

In the wake of sweeping health care reform, consumers will need to be wary of con artists promoting fraudulent plans and benefits.  State regulators are already struggling to stop fraudulent health insurance plans, a growing problem that has cheated tens of thousands of consumers at a cost of tens of millions of dollars, according to Sean P. Carr, Washington Correspondent in an article published March 23, 2010, by InsuranceNewsNet.com.

According to the article:

Fraudulent plans continue to grow in size and scope. "There's no end in sight," said James Quiggle, communications director for the Coalition Against Insurance Fraud.  A common scam involves plans that promise full health care coverage but deliver worthless policies or lesser products designed to look like comprehensive coverage, said Quiggle, who has studied the issue for years. Consumers may purchase "limited benefit" plans or medical discount cards that often present themselves as providing full insurance coverage -- until the bills come, he said. Such fraudulent plans surged in the early 2000s, Quiggle said. When confronted, companies sometimes claimed they were not subject to state insurance regulation...Regulators knocked many of them out of business in the mid-2000s, he said, but the combined effects of recession, sustained joblessness and increasing numbers of uninsured provided a target-rich environment for their return. The number of people victimized are in the tens of thousands, he said.