Reed Tinsley, CPA

Analyze potential social security benefits as source of retirement income

I'm a strong believer of planning for your retirement; unfortunately most physicians are not very good at it if they attempt to do it at all. If you haven't started any form of planning, start now - meet with your financial planner or accountant to begin the process. For you younger physicians, the earlier you can start the better.

One simple place to begin is to take a look at your potential social security benefits as a source of retirement income. Go to http://www.socialsecurity.gov/mystatement/ and get the following information:

• Estimates of the retirement and disability benefits they may receive;
• Estimates of benefits their family may get when they receive Social Security or die;
• A list of their lifetime earnings according to Social Security’s records;
• The estimated Social Security and Medicare taxes they’ve paid;
• Information about qualifying and signing up for Medicare;
• Things to consider for those age 55 and older who are thinking of retiring;
• General information about Social Security for everyone;
• The opportunity to apply online for retirement and disability benefits; and
• A printable version of their Social Security Statement.

Discontinuance of long term care insurance?

To all of our clients and loved ones…Please read this carefully – a word from Sean Tinsley

It has come to our attention that recent increases in the cost of medical care have risen to the point that the insurance industry can no longer make a profit selling long term care insurance. As of this December 22, 2011 many of the best known insurance companies in the United States, including Guardian, will
discontinue these products indefinitely.

Long Term Care is generally not a very well known type of insurance but it is actually one of the most often needed and executed types of policies. In fact, you are seven times more likely to need some form of long term care assistance in the future than you are to die prematurely and recapture your premiums from your term life insurance policies.

The most pressing concern with the discontinuance of Long Term Care insurance is the impact it will have on our client’s retirement plans. The average cost per day for qualified long term care assistance is about $150 per day. At a cost of roughly $4,500 per month for care it is easy to see how spending an additional $54,000 per year can easily eat through your retirement savingsand completely derail and financial planning that has been done up to that.

Here’s a brief look at what you can expect to receive for $150 per day should you need assistance in any way:

In home assistance: The average cost for an in home assistant is $18 per hour. This person will cook, do some light cleaning/laundry, bathe and dress, drive you to your doctors’ appointments, dispense medications, assist with toileting, change the bed sheets, and any other normal daily functions that you nee help with. If you require assistance 24/7 there is usually a discount on the $18 per hour.

Facility Care: There are two types of facilities that are most used during periods when long term care is required...assisted living facilities and nursing homes.

Assisted living is basically a hotel style retirement community with onsite staff. They will coordinate group activities, provide all daily meals, & maid service (in most cases). This type of facility will give you your own apartment/room and let you come and go as you please. This usually costs about $4,000 to $5,000 per month. Although, I have seen facilities that are "luxury" assisted living and can run $100,000 per year or more. Respite care is also a popular feature of these facilities. What this means is that if you have a family member still living at home who requires assistance and you want to leave to go on vacation, you could drop your family member off for a week or two at the assisted living facility for a short stay while you're gone.

Nursing homes are for those who require 24/7 supervision and they provide nursing care onsite. These facilities generally do not let come and go as they please. They dispense medications; provide all long term care needs which include eating, bathing, dressing, transference, and toileting. Medicare will pay for beds in these facilities...However, only 2-3% of the beds in these facilities are designated for Medicare patients and therefore the waiting lists can be more than a year in most cases. Private pay patients will always get preferential treatment in the long term care world.

This is a growing concern in our industry and will create drastic changes in the retirement plans that we have already designed and implemented for everyone. I would highly recommend that you at least consider filling out an application for this insurance before the deadline even if it is only to give you additional time to consider whether or not you want to move forward and buy the coverage. It never costs anything to fill out an application but it could end up costing you your retirement savings if you don’t. In many cases the cost of the Long Term Care insurance can be deducted from your taxes at the end of the year but your exact tax deduction is determined on an individual case by case basis.

I understand how annoying it can be to be “pushed” into buying insurance. I receive countless spam emails and phone calls urging me to switch my car insurance, home owner’s policies, etc…. Please don’t mistake this offer for Long Term Care insurance for something so trivial. It really is worth a conversation at the least.

Please feel free to contact either Sean Tinsley at (512) 659-0643 CELL or (512) 651-3126 at any time should you feel the need to discuss your options. I look forward to walking you through your options personally.

Why every physician needs a good insurance agent and financial planner

Insurance agent(s)  Insurance is your indispensible first line of defense against a variety of exposures from malpractice to data breach and even traditional life and health. In many cases these needs are served by two different agents, one who handles life insurance planning for the staff and principals and another who is a property and casualty or “P&C” professional to help with liability coverage and health insurance. There are certainly many agencies that do both, but my experience with thousands of doctors leads me to believe that most are better at one or the other. I also prefer multi-line agents that have the entire universe of products available to suit my client’s needs at competitive pricing, not just one insurance carrier’s line.

Financial planner  As corny as it sounds, People don’t plan to fail, they just fail to plan. I typically find that most physicians pay more attention to their business finances than their personal finances. However, the two should go hand in hand. Want an example? You would not believe how many doctors practicing today HAVE TO WORK – they can’t retire and simply live off their retirement savings. 

A good financial planner will address these areas:

• Are you adequately insured
• Are you planning for retirement
• Are you saving
• Are you planning for college education
• Do you have an estate plan
• Working with legal counsel, are your assets protected
• Do you even have a written financial plan in place
• Is there diversity in your investment portfolio

A financial planner should also work with your CPA to identify opportunities to reduce taxes and allow to safely and predictably keep more of everything you earn by examining the costs and benefits of things like retirement plans and other legal tax deferment strategies.

IRS Tips for Pre-Approved Retirement Plans

In the latest edition of Retirement News for Employers (available at www.irs.gov/pub/irs-tege/rne_win11.pdf ), the IRS reminds employers of their responsibilities concerning pre-approved plans that have been purchased. The tips include questions to ask with respect to service agreements, understanding the features chosen in adoption agreements, communicating with the plan sponsor and administrator, coordinating with the employer's payroll processor, and periodic reviews of the plan. Additional tools and resources can be found at www.irs.gov/retirement .

Could Your Family Benefit from a Family Limited Partnership?

Effective estate planning should address wealth transfer from a practical and cost-effective approach. One estate planning strategy that families with closely held businesses should consider is the family limited partnership.

What Is a Family Limited Partnership?

A family limited partnership is a partnership agreement that exists between family members who are actively involved in a trade or business. The partnership divides rights to income, appreciation, and control among the family members, according to the family’s overall objectives. Under family partnership rules, the “family business” can include real estate or investments.

How Is This Arrangement Achieved?

Under the most common form of family partnership, you would begin by creating general and limited partnership interests in your business. Once the partnership is established, you then gift the limited partnership interests to your children.

By holding the general partnership interest, you are considered the “general partner” and maintain control over the enterprise. Your children are the “limited partners,” and the limited partnership interest lets them share in the ownership of your business as well.

A Sound Strategy for Transferring Ownership

A family limited partnership enables you to provide your children with an interest in your business while achieving many goals. First, you can gauge whether or not they possess suitable ownership abilities by involving them in the business. Second, it removes the asset from the parents‘ estate, thus lowering the estate tax liability, if properly executed. In addition, you can transfer the limited partnership interests in increments over time, resulting in a gradual, systematic transfer of ownership. Finally, and perhaps most importantly, there may be immediate income tax benefits.

Estate Tax Savings

The interests transferred to your children, including all appreciation since the transfer, escape inclusion in your estate when you die. Only the value of the taxable gift(s) will be included. This can result in estate tax savings down the road.

The Benefits of Leverage

By giving the partnership interests in increments over time, you can take maximum advantage of the $13,000 annual gift tax exclusion. The exclusion increases to $26,000 if you’re married and if each spouse elects to give the maximum amount. The gift tax exclusion is indexed for inflation.

In addition, “minority discounts” — allowable reductions to the value of the gift because it is a minority interest — can lead to greater leverage of the annual exclusion and the unified credit. For instance, you may be able to discount the value of the gift up to 30 percent or more. However, in order for the discount to be valid, there must be a legitimate business reason for the partnership.

Generally, your wish to keep the business in the family is a legitimate reason to set up a partnership agreement — as long as you are joined together for the purpose of enterprise and not just to avoid taxes.

Income Tax Benefits

Aside from the estate planning advantages, the family limited partnership can result in substantial income tax savings. By including your children as partners and sharing partnership income with them, total family taxes may be reduced.

You should be aware, however, that if the income is unearned and the recipient is under age 14, “kiddie tax” rules will apply.

Other Opportunities Can Serve Your Family

In addition to family limited partnerships, there are other arrangements that can serve family interests:

Family partnerships are arrangements under which each partner must play a role in the management and day-to-day operations of the business. Many of the benefits are similar to that of a limited partnership, but the family members accept more liability and will be more involved in the business. As managing partner, however, you must always receive a minimum income share that is proportional to the value of your services.

In addition, minors typically cannot be partners unless there is someone who controls the interest for the minor.

Investment partnerships are partnerships that hold nonbusiness assets such as securities and real estate that are likely to grow in value. Families can base a limited partnership on an investment partnership. In some cases, however, the arrangement would be considered an investment company, and gains and losses will be realized on the transfer of property to the partnership. Normally, under partnership rules, gains and losses are not realized when transferred to the partnership.

Seek Professional Guidance

The benefits of the family limited partnership can be significant. But they can only be realized if the arrangement is valid under the requirements of the IRS. Consult a qualified legal or tax advisor if you think your family could benefit from a family limited partnership.

Continuity planning for physicians

Planning can ensure that your family and medical practice (or any other healthcare entity) business are protected. The long term survival of any business like a medical practice—and the well-being of your family—are factors that you should consider if you haven’t already.

 

The main goals of creating an estate plan for your business are:

 

• To establish a business continuation plan that can help provide benefits for your practice and your heirs.

• To meet your objectives for asset distribution.

• To potentially reduce taxes for your heirs.

 

To make sure that an business estate plan is up-to-date and effective, these are some of the concerns that you should document on an annual basis:

 

q Is there a business continuation plan in place? Does the plan identify the owner’s successors? If so, are these successors trained and ready to take over when necessary?

q Is the insurance coverage adequate to keep the business going?

q Are financial arrangements up-to-date? For example, are new sources of capital to fund expansion, purchases, new product lines and buy-sell agreements identified?

q Is the practice properly valued?

q Are employees informed about the future plans for the business? Knowing that the business has a continuity plan can help keep good employees on staff.

 

Make sure that you have issued detailed instructions to an executor. It is important to document everything relating to your medical practice and personal assets (e.g., the locations of all safety deposit boxes and investment accounts), even if your heirs will not actively run the business. This document should discuss management plans, shareholder agreements, buy-sell agreements and other issues vital to the company’s future. By keeping this information up to date, you will make it much easier for someone to take over or liquidate.

 

Planning today could go a long way in helping alleviate asset distribution headaches for your heirs and partners. Creating a proper estate plan requires careful planning and input from trained legal, tax and financial professionals.

Asset protection strategies for you and your medical practice

There are a number of relatively simple strategies an organization can use to provide significant protection for its assets.

Separate Entities. Consider creating a separate entity (possibly a limited liability company) to hold real estate, machinery, or assets relating to a new line of business. If there were a future judgment against the corporation, the assets held in the separate entity or entities would likely not be subject to that judgment as long as appropriate formalities were followed. Tax issues can arise in connection with the transfer of assets, and these should be considered prior to any transfers. For example, the transfer of real estate out of a C corporation into a limited liability company could trigger a significant amount of tax, and thus make the transfer impractical. But if additional real estate or a significant piece of machinery or equipment is being acquired, having a new limited liability company purchase it (and then lease it to the corporation) could have significant advantages. 

Limited Liability Companies. A limited liability company (“LLC”) is a hybrid type of legal entity that has some characteristics of a corporation and some characteristics of a partnership. 

• Owners of an LLC are called members;
• They can elect to receive pass through tax treatment like a partnership or an S corporation, or to have the LLC taxed like a C corporation;
• They have limited liability like in a corporation; 
• They have a great deal of flexibility in management structure. 

LLCs can provide significant asset protection advantages. A creditor of an owner of a corporation (that is, a creditor of a stockholder) often can gain control of a corporation by getting control of the owner’s stock. Creditors will have a much more difficult time gaining control of an LLC. Thus, many business owners now prefer to form an LLC instead of a corporation when the need for an additional entity arises.

Insurance. Review all of your business insurance with both your attorney and your insurance agent. Since your attorney is not selling any insurance products, he or she can often provide an objective review of the types and amount of your business insurance. Having adequate insurance is one of the most important (and generally one of the most cost effective) ways to provide protection for your business.

Update Corporate Records and Follow Required Formalities. Many physician practices do not keep their corporate record books up to date. In the event of a lawsuit against the company, a plaintiff’s attorney can attempt to “pierce to corporate veil”. This means the corporation will essentially be ignored and the owners (shareholders) will be personally liable for the corporate debts.  Following basic corporate formalities, including

• Holding an annual shareholders meeting;
• Holding regular meetings of the Board of Directors;
• Avoiding any mixing of personal and corporate assets; and
• Keeping corporate records up to date.

will all help to insure that the assets of the owner(s) of the medical practice are insulated from any judgment against the business. One of the many advantages of an LLC over a corporation is that LLCs require fewer formalities in both their organization and operation. However, piercing of the LLC veil is also possible under various circumstances, including inadequate capitalization or failure to maintain a separate indentity (for example, failing to have a separate bank account for the LLC). 

Business Succession Plan. Many physician owners lose sleep worrying about lawsuits and other potential legal claims. While these concerns are often justified, more businesses collapse from lack of a business succession plan than from a lawsuit bought by a party unrelated to the business. Lack of such a plan can lead to fights among family members, including litigation, which can be disastrous at both a business and a personal level. Paying attention in advance to at least some form of succession plan can save an enormous amount of trouble later. Life insurance should be considered as one part of the business succession arrangement. Good business succession planning is also a form of asset protection planning. 

General Legal Review of Business Operations. Is your physician practice in compliance with applicable employment laws and other regulatory requirements? Has your employee manual been reviewed recently? One lawsuit will likely cost far more than a basic legal compliance review. A legal “check up” is like a medical checkup: identifying one or more serious problems and taking care of them now can avoid a much greater problem later. 

Is an LLC Better than a Corporation for Asset Protection Purposes

This question always comes up when discussing and designing an asset protection program for a physician who has significant non-exempt assets that can be attached by current or potential creditors. In most cases, a limited liability company (LLC) will generally provide better asset protection to its owner than a corporation. However you must seek legal counsel to help you design an asset protection program that is right for you and your own particular business and financial situation. Like having a personal will in place, asset protection should be a priority to you.

A limited liability company (“LLC”) is a hybrid type of legal entity that has some characteristics of a corporation and some characteristics of a partnership. Owners of an LLC are called members; they can elect to receive pass through tax treatment like a partnership or an S corporation, or to have the LLC taxed like a C corporation; they have limited liability like in a corporation; and they have a great deal of flexibility in management structure. Thus, many business owners now prefer to form an LLC instead of a corporation when the need for an additional entity arises.

LLCs provide significant asset protection advantages. A creditor of an owner of a corporation (that is, a creditor of a stockholder) often can gain control of a corporation by getting control of the owner’s stock. Shares of stock in a corporation are assets that can be “attached” or otherwise taken by a creditor to satisfy a judgment against the owner of the shares. Once the creditor has control of the shares, it can generally vote the shares and possibly gain control of the business entity. Thus, if you own all the stock of ABC Corporation and one of your creditors is able to take that stock, the creditor will control (and own) ABC Corporation. A membership interest in an LLC, however, is treated differently. A creditor of the owner of an LLC, generally cannot gain control of the member’s interest, because LLCs have what is called “charging order protection." If and when the LLC makes a distribution to you, the creditor can take it. However, the creditor generally cannot force a distribution or gain voting control of the LLC. The bottom line is that a creditor of the owner of an LLC membership interest has much less leverage than a creditor of an owner of stock in a corporation. 

Getting ready for the new liberalized IRA-to-Roth-IRA conversion rules

This year will be a pivotal one for retirement planning, as it will be the first year in which taxpayers will be able to convert funds in regular IRAs (as well as qualified plan funds) to Roth IRAs regardless of their income level. This new conversion option poses significant tax planning challenges and opportunities for 2009, 2010 and 2011.

Conversions to Roth IRAs. For 2009, taxpayers (other than married persons filing separately) with modified adjusted gross income (AGI) of $100,000 or less may convert amounts in a traditional IRA to amounts in a Roth IRA. Amounts from a SEP-IRA or a SIMPLE IRA also may be converted to a Roth IRA, but a conversion from a SIMPLE IRA may be made only after the 2-year period beginning on the date on which the taxpayer first participated in any SIMPLE IRA maintained by the taxpayer's employer.

For purposes of conversions to Roth IRAs, AGI is defined as it is for traditional IRA purposes except that it does not include income resulting from the conversion from a traditional IRA to a Roth IRA. AGI—for purposes of determining conversion eligibility only—does not include any required minimum distribution from an IRA.

A conversion from a regular IRA to a Roth IRA is subject to tax as if it were distributed from the traditional IRA and not recontributed to another IRA, but isn't subject to the 10% premature distribution tax.

After Dec. 31, 2007, distributions from a qualified plan also may be rolled over to a Roth IRA.

Major change coming in 2010. For tax years beginning after 2009, the $100,000 modified AGI limit on conversions of traditional IRAs to Roth IRAs is eliminated. Additionally, married taxpayers filing a separate return will be able to convert amounts in a traditional IRA into a Roth IRA (currently they are barred from doing so).

Why make a IRA-to-Roth IRA conversion? Roth IRAs have two major advantages over regular IRAs:

(1) Distributions from regular IRAs are taxed as ordinary income (except to the extent they represent nondeductible contributions). By contrast, Roth IRA distributions are tax-free if they are “qualified distributions,” that is, if they are made (1) after the 5-tax-year period that begins with the first tax year for which the taxpayer made a contribution to a Roth IRA, and (2) when the account owner is 59 1/2 years of age or older, or on account of death, disability, or the purchase of a home by a qualified first-time homebuyer (limited to $10,000).

 

(2) Regular IRAs are subject to the lifetime required minimum distribution (RMD) rules that generally require minimum annual distributions to be made commencing in the year following the year in which the IRA owner attains age 70 1/2. By contrast, Roth IRAs aren't subject to the lifetime RMD rules that apply to regular IRAs (as well as individual account qualified plans).

A similar comparison could be made between distributions from qualified retirement plans and Roth IRAs.

There are other tax advantages: Because distributions from Roth IRAs are tax-free (if they are qualified distributions), they may keep a taxpayer from being taxed in a higher tax bracket that would otherwise apply if he were withdrawing taxable distributions, don't enter into the calculation of tax owed on Social Security payments, and have no effect on AGI-based deductions. What is more, the benefits flow through to beneficiaries of Roth IRA accounts, who also can make tax-free withdrawals from such accounts (they are, however, subject to the same annual post-death minimum distribution rules that apply to beneficiaries of regular IRAs).

Who should make IRA-to-Roth IRA conversions? The consensus view is that the conversion route should be considered by taxpayers who:

... have a number of years to go before retirement (and are therefore able to recoup the dollars that are lost to taxes on account of the conversion);

... anticipate being taxed in a higher bracket in the future than they are now; and

... can pay the tax on the conversion from non-retirement-account assets (otherwise, there will be a smaller buildup of tax-free earnings in the depleted retirement account).

Complicating factor for 2010 conversions. A unique income inclusion rule will apply for IRA-to-Roth-IRA conversions occurring in 2010. Unless a taxpayer elects otherwise, none of the gross income from the conversion is included in income in 2010; half of the income resulting from the conversion will be includible in gross income in 2011 and the other half in 2012.

A major wild card in making this choice is the tax-rate picture after 2010. Absent Congressional action, after 2010 the tax brackets above the 15% bracket will revert to their pre-2001 levels. That means the top four brackets will be 39.6%, 36%, 31%, and 28%, instead of the current top four brackets of 35%, 33%, 28%, and 25%. The Administration has proposed to increase taxes only for those making $250,000, but it is difficult, at this point in time, to predict who will get hit by higher rates. What's more, there are proposals on the table to help finance health reform with a surtax on higher-income taxpayers.

What do to for 2009. Taxpayers who intend to take advantage of the new conversion option next year should consider the following strategies:

... Non-high-income taxpayers who are able to make deductible IRA contributions this year should do so. They'll reduce their 2009 tax bill and, if they make the conversion to Roth IRA next year, they won't have to pay back the tax savings until 2011 and 2012.

 

... High income taxpayers should consider making nondeductible IRA contributions this year. They can then roll over the accounts into Roth IRAs next year at no tax cost.

 

... Some high-income taxpayers plan to make large conversions in 2010 but to opt out of the deferral of tax until 2011 and 2012 because they fear they will be in a higher tax bracket in those years than in 2010. These taxpayers should avoid the standard year-end-planning wisdom of accelerating deductions and deferring income but should, rather, do the reverse in an effort to avoid being pushed into the highest brackets by a large IRA-to-Roth-IRA conversion. These taxpayers should be considering ways to defer deductions to 2010, and accelerate income from next year into 2009.

Two-Thirds Don’t Have a Financial Plan

Despite increasing pressure to slash debt and rebuild retirement funds, nearly two-thirds of consumers do not have a written financial plan, according to the 2009 National Consumer Survey on Personal Finance. The survey, released today by the Certified Financial Planner Board of Standards, found that 64% of respondents do not have a written financial plan in place.

But those with a college degree, higher household incomes and more assets to invest are more likely to have one. Of the 284 respondents who have a written financial plan in place, 62% were motivated to have one because of retirement goals and planning. Meanwhile, 48% wanted advice on a broad range of financial matters, 41% were focused on savings goals and planning and 36% were concerned with investment goals and planning. The CFP spoke to 1,742 respondents in total.

Respondents who don’t use a financial planner are hesitant because their pecuniary situation is not complicated enough. Most are confused about what a financial planner does or believe that it’s too expensive to use one.

So take note: It’s important to develop a healthy baseline [financial plan] and not just use it in times of crisis. As the saying goes, people don’t plan to fail, they just fail to plan.