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Taking care of aging parents is something you may need to plan for, especially if you think one or both of them might need long-term care. One thing you may not know is that some states have filial responsibility laws that require adult children to help financially with the cost of nursing home care. Whether these laws affect you or not depends largely on where you live and what financial resources your parents have to cover long-term care. But itâs important to understand how these laws work to avoid any financial surprises as your parents age.
Filial Responsibility Laws, Definition
Filial responsibility laws are legal rules that hold adult children financially responsible for their parentsâ medical care when parents are unable to pay. More than half of U.S. states have some type of filial support or responsibility law, including:
- New Jersey
- North Carolina
- North Dakota
- Rhode Island
- South Dakota
- West Virginia
Puerto Rico also has laws regarding filial responsibility. Broadly speaking, these laws require adult children to help pay for things like medical care and basic needs when a parent is impoverished. But the way the laws are applied can vary from state to state. For example, some states may include mental health treatment as a situation requiring children to pay while others donât. States can also place time limitations on how long adult children are required to pay.
When Do Filial Responsibility Laws Apply?
If you live in a state that has filial responsibility guidelines on the books, itâs important to understand when those laws can be applied.
Generally, you may have an obligation to pay for your parentsâ medical care if all of the following apply:
- One or both parents are receiving some type of state government-sponsored financial support to help pay for food, housing, utilities or other expenses
- One or both parents has nursing home bills they canât pay
- One or both parents qualifies for indigent status, which means their Social Security benefits donât cover their expenses
- One or both parents are ineligible for Medicaid help to pay for long-term care
- Itâs established that you have the ability to pay outstanding nursing home bills
If you live in a state with filial responsibility laws, itâs possible that the nursing home providing care to one or both of your parents could come after you personally to collect on any outstanding bills owed. This means the nursing home would have to sue you in small claims court.
If the lawsuit is successful, the nursing home would then be able to take additional collection actions against you. That might include garnishing your wages or levying your bank account, depending on what your state allows.
Whether youâre actually subject to any of those actions or a lawsuit depends on whether the nursing home or care provider believes that you have the ability to pay. If youâre sued by a nursing home, you may be able to avoid further collection actions if you can show that because of your income, liabilities or other circumstances, youâre not able to pay any medical bills owed by your parents.
Filial Responsibility Laws and Medicaid
While Medicare does not pay for long-term care expenses, Medicaid can. Medicaid eligibility guidelines vary from state to state but generally, aging seniors need to be income- and asset-eligible to qualify. If your aging parents are able to get Medicaid to help pay for long-term care, then filial responsibility laws donât apply. Instead, Medicaid can paid for long-term care costs.
There is, however, a potential wrinkle to be aware of. Medicaid estate recovery laws allow nursing homes and long-term care providers to seek reimbursement for long-term care costs from the deceased personâs estate. Specifically, if your parents transferred assets to a trust then your stateâs Medicaid program may be able to recover funds from the trust.
You wouldnât have to worry about being sued personally in that case. But if your parents used a trust as part of their estate plan, any Medicaid recovery efforts could shrink the pool of assets you stand to inherit.
Talk to Your Parents About Estate Planning and Long-Term Care
If you live in a state with filial responsibility laws (or even if you donât), itâs important to have an ongoing conversation with your parents about estate planning, end-of-life care and where that fits into your financial plans.
You can start with the basics and discuss what kind of care your parents expect to need and who they want to provide it. For example, they may want or expect you to care for them in your home or be allowed to stay in their own home with the help of a nursing aide. If thatâs the case, itâs important to discuss whether thatâs feasible financially.
If you believe that a nursing home stay is likely then you may want to talk to them about purchasing long-term care insurance or a hybrid life insurance policy that includes long-term care coverage. A hybrid policy can help pay for long-term care if needed and leave a death benefit for you (and your siblings if you have them) if your parents donât require nursing home care.
Speaking of siblings, you may also want to discuss shared responsibility for caregiving, financial or otherwise, if you have brothers and sisters. This can help prevent resentment from arising later if one of you is taking on more of the financial or emotional burdens associated with caring for aging parents.
If your parents took out a reverse mortgage to provide income in retirement, itâs also important to discuss the implications of moving to a nursing home. Reverse mortgages generally must be repaid in full if long-term care means moving out of the home. In that instance, you may have to sell the home to repay a reverse mortgage.
The Bottom Line
Filial responsibility laws could hold you responsible for your parentsâ medical bills if theyâre unable to pay whatâs owed. If you live in a state that has these laws, itâs important to know when you may be subject to them. Helping your parents to plan ahead financially for long-term needs can help reduce the possibility of you being on the hook for nursing care costs unexpectedly.
Tips for Estate Planning
- Consider talking to a financial advisor about what filial responsibility laws could mean for you if you live in a state that enforces them. If you donât have a financial advisor yet, finding one doesnât have to be a complicated process. SmartAssetâs financial advisor matching tool can help you connect, in just minutes, with professional advisors in your local area. If youâre ready, get started now.
- When discussing financial planning with your parents, there are other things you may want to cover in addition to long-term care. For example, you might ask whether theyâve drafted a will yet or if they think they may need a trust for Medicaid planning. Helping them to draft an advance healthcare directive and a power of attorney can ensure that you or another family member has the authority to make medical and financial decisions on your parentsâ behalf if theyâre unable to do so.
Photo credit: Â©iStock.com/Halfpoint, Â©iStock.com/byryo, Â©iStock.com/Halfpoint
The post An Overview of Filial Responsibility Laws appeared first on SmartAsset Blog.
Reaching your twenties is an exciting milestone for most as it means youâve officially entered adulthood. Along with that milestone comes new responsibilities and worries that we didnât picture when our teenage selves dreamed of turning 21. We imagined our college graduation, moving into our first apartment, and launching our new career. That vision didnât include dealing with student loan debt, taking on a low paying entry-level job, or having to confront that despite spending 4 years in college, youâre still unsure how the world of personal finance actually works.
Itâs easy to dismiss it all because well youâre a 20 something, and youâll have plenty of time to play catch up. The reality is that each decade plays an important role in our future financial health. Take the time now to learn about your money and follow the money moves outlined below to put yourself on a path of lifelong financial success and eventual freedom.
Money Moves to Make in Your 20âs:
Learn How To Budget
Building a budget doesnât have to be overly complicated or time-consuming. Itâs actually the first step in putting yourself in control of your finances because it means you know where your money goes each month. The good news is that there are lots of apps and online tools that can make the process a breeze. Consider a system like Mint that will connect to your accounts and automatically categorize your spending for you. The right budgeting tool is simply the one youâll stick with long term.
Pay Off Debt
Debt isnât all bad. It may be the reason you were able to earn your degree, and a mortgage may help you one day buy a home. It can also quickly overrun your life if you arenât careful. Nowâs the perfect time before life gets more hectic with family commitments to buckle down and tackle any loans or credit card balances so you can be debt-free going into your 30âs.
Build a Cash Cushion
The financial downturn caused by the pandemic has reminded the whole world of the importance of having an emergency fund. We donât know what life is going to throw at us and having a cushion can help you navigate the uncertain times. Though itâs not all about having a secret stash of cash to deal with the bad news of life (medical bills, car repair, layoff), it can also be about having the cash to seize an exciting opportunity. Having savings gives you the freedom and security to deal with whatever life brings your way – good or bad.
Your credit score can dictate so much of your life. That little number can play a big role in the home you buy, the car you drive, and even the job you hold as some employers (especially in the finance world) will pull your credit. Itâs important that you check your credit report and score (also available through Mint), learn how itâs calculated, and work to improve it.
Money Moves to Make in Your 30âs:
Invest For Retirement
Now that youâve spent your 20âs building the foundation for your financial life, itâs time to make sure youâre also tackling the big picture goals like saving and investing for retirement. I typically recommend that clients save 10% to 15% of their annual income towards retirement. That may seem like an insurmountable goal, but starting small by saving even 1 to 3% of your salary can make a big difference in the future. Also, make sure to take advantage of any matching contributions that your employer may provide in your retirement plan. If, for example, they offer to match contributions up to 6%, I would try hard to work towards contributing at least 6%.
Buying Your First Home
Buying your first home is a top goal for many, but it also seems to be getting increasingly more difficult especially if you live in a major city. The most important steps you can take is to improve your credit score, pay down high-interest debt, and be aggressive about saving for a down payment. Saving 20% down will help you qualify for the best loan terms and interest rate, but there are still home loans available even if you arenât able to save that much. Just be realistic with your budget and what you can afford. Donât let a lender or real estate agent determine what payment will fit into your budget.
Be Covered Under These Must-Have Insurances
Youâve spent the last several years building your savings and growing your family. Itâs now crucial that you have the proper insurance coverage in place to protect your assets and your loved ones. Life and disability insurance are top of the list. Life insurance doesnât have to be expensive or complex. Get a quote for term-life that will last a set number of years and protect your partner and children during those crucial years that they depend on you. Disability insurance protects your income if you become sick or injured and are unable to work. Your earning ability is one of your biggest assets during this time, and you should protect it. This coverage may be offered through your employer, or you can request a quote for an individual policy.
Invest in Self-Care and Well Being
Mental health is part of self-care and wealth. Most people donât talk about how financial stress and worry affect their overall health. When you can take care of yourself on all levels, you will feel healthier and wealthier, and happier. But it is not easy. It takes work, effort, awareness, and consciousness to learn how to detach the value in your bank account or financial account from your self-worth and value as a human being. When you feel emotional about your money, investments, or the stock market, learn ways to process them and take care of yourself by hiring licensed professionals and experts to help you.
Money Moves to Make in Your 40âs:
Revisit Your College Savings Goal
As your kids get older and prepare to enter their own journey into adulthood, paying for college is likely a major goal on your list. Consider opening a 529 plan (if you havenât already) to save for their education. 529 plans offer tax advantages when it comes to saving for college. There are lots of online resources that can help you understand and pick the right plan for you. Visit https://www.savingforcollege.com. This is also a great time to make sure you’re talking to your kids about money. Give them the benefit of a financial education that you may not have had.
Get Aggressive with Retirement Planning
Your 40âs likely mark peak earning years. Youâll want to take advantage of your higher earnings to maximize your retirement savings especially if you werenât able to save as much in your 20âs and 30âs. Revisit your retirement plan to crunch the numbers so you’ll be clear on what you need to save to reach your goal.
Build More Wealth
Youâve arrived at mid-life probably feeling younger than you are and wondering how the heck that big 4-0 got on your birthday cake. We typically associate being 20 with being free, but I think weâve got it wrong. There is something incredibly freeing about the wisdom and self-assurance that comes with getting older. Youâve proved yourself. People see you as an adult. Your kids are getting older and your finances are more settled. Nowâs the time to kick it up to the next level. Look for ways to build additional wealth. This may mean tapping into your entrepreneurial side to launch the business youâve dreamed of or buying real estate to increase passive income. Nowâs also a great time to find a trusted financial advisor who can help guide your next steps and help you plan the best ways to build your wealth.
Revisit Your Insurance Coverage
Insurance was crucial before, but itâs time to revisit your coverage and make sure youâre protected especially if you decide to launch a business or buy additional real estate. This is also where a financial advisor can help you analyze your coverage needs and find the policies that will work for you.
Consider Estate Planning
Estate planning (think wills, trusts, power of attorney) isnât the most fun / exciting topic. It involves imagining your gone and creating a plan for the loved ones you leave behind. It is also often overlooked by adults in their younger years. Itâs easy to assume estate planning is something the wealthy need to do. It really comes down to whether you want to decide how your life savings will be managed or if you want a court to decide. Itâs also crucial for parents with children who are minors to select a guardian and have those uncomfortable conversations with their family members about who would care for the children if the worst were to happen. Itâs also a good time to visit this topic with your own aging parents and make sure they have the proper documents and plans in place.
Whether you’re in your 20âs, 30âs or 40âs, it can be easy to put off planning your finances especially in the middle of a pandemic. Most of us are busy, and itâs easy to tell yourself that youâll have time to work on a goal in the future. Commit to setting aside one hour each week or even each month to have a money date and review your finances. Donât let yourself reach a milestone birthday (30, 40) and regret not being farther ahead. Follow these money moves now to seize control of your financial future.
The post Money Moves to Make in Your 20s, 30s, and 40s appeared first on MintLife Blog.
Inheriting property or other assets typically involves filing the appropriate tax forms with the IRS. Schedule K-1 (Form 1041) is used to report a beneficiaryâs share of an estate or trust, including income as well as credits, deductions and profits. A K-1 tax form inheritance statement must be sent out to beneficiaries at the end of the year. If youâre the beneficiary of an estate or trust, itâs important to understand what to do with this form if you receive one and what it can mean for your tax filing.
Schedule K-1 (Form 1041), Explained
Schedule K-1 (Form 1041) is an official IRS form thatâs used to report a beneficiaryâs share of income, deductions and credits from an estate or trust. Itâs full name is âBeneficiaryâs Share of Income, Deductions, Credits, etc.â The estate or trust is responsible for filing Schedule K-1 for each listed beneficiary with the IRS. And if youâre a beneficiary, you also have to receive a copy of this form.
This form is required when an estate or trust is passing tax obligations on to one or more beneficiaries. For example, if a trust holds income-producing assets such as real estate, then it may be necessary for the trustee to file Schedule K-1 for each listed beneficiary.
Whether itâs necessary to do so or not depends on the amount of income the estate generates and the residency status of the estateâs beneficiaries. If the annual gross income from the estate is less than $600, then the estate isnât required to file Schedule K-1 tax forms for beneficiaries. On the other hand, this form has to be filed if the beneficiary is a nonresident alien, regardless of how much or how little income is reported.
Contents of Schedule K-1 Tax Form Inheritance Statements
The form itself is fairly simple, consisting of a single page with three parts. Part one records information about the estate or trust, including its name, employer identification number and the name and address of the fiduciary in charge of handling the disposition of the estate. Part Two includes the beneficiaryâs name and address, along with a box to designate them as a domestic or foreign resident.
Part Three covers the beneficiaryâs share of current year income, deductions and credits. That includes all of the following:
- Interest income
- Ordinary dividends
- Qualified dividends
- Net short-term capital gains
- Net long-term capital gains
- Unrecaptured Section 1250 gains
- Other portfolio and nonbusiness income
- Ordinary business income
- Net rental real estate income
- Other rental income
- Directly apportioned deductions
- Estate tax deductions
- Final year deductions
- Alternative minimum tax deductions
- Credits and credit recapture
If you receive a completed Schedule K-1 (Form 1041) you can then use it to complete your Form 1040 Individual Tax Return to report any income, deductions or credits associated with inheriting assets from the estate or trust.
You wouldnât, however, have to include a copy of this form when you file your tax return unless backup withholding was reported in Box 13, Code B. The fiduciary will send a copy to the IRS on your behalf. But you would want to keep a copy of your Schedule K-1 on hand in case there are any questions raised later about the accuracy of income, deductions or credits being reported.
Estate Income and Beneficiary Taxation
If you received a Schedule K-1 tax form, inheritance tax rules determine how much tax youâll owe on the income from the estate. Since the estate is a pass-through entity, youâre responsible for paying income tax on the income thatâs generated. The upside is that when you report amounts from Schedule K-1 on your individual tax return, you can benefit from lower tax rates for qualified dividends. And if thereâs income from the estate that hasnât been distributed or reported on Schedule K-1, then the trust or estate would be responsible for paying income tax on it instead of you.
In terms of deductions or credits that can help reduce your tax liability for income inherited from an estate, those can include things like:
- Depletion allocations
- Estate tax deduction
- Short-term capital losses
- Long-term capital losses
- Net operating losses
- Credit for estimated taxes
Again, the fiduciary whoâs completing the Schedule K-1 for each trust beneficiary should complete all of this information. But itâs important to check the information thatâs included against what you have in your own records to make sure that itâs correct. If thereâs an error in reporting income, deductions or credits and you use that inaccurate information to complete your tax return, you could end up paying too much or too little in taxes as a result.
If you think the information in your Schedule K-1 (Form 1041) is incorrect, you can contact the fiduciary to request an amended form. If youâve already filed your taxes using the original form, youâd then have to file an amended return with the updated information.
Schedule K-1 Tax Form for Inheritance vs. Schedule K-1 (Form 1065)
Schedule K-1 can refer to more than one type of tax form and itâs important to understand how they differ. While Schedule K-1 (Form 1041) is used to report information related to an estate or trustâs beneficiaries, you may also receive a Schedule K-1 (Form 1065) if you run a business thatâs set up as a pass-through entity.
Specifically, this type of Schedule K-1 form is used to record income, losses, credits and deductions related to the activities of an S-corporation, partnership or limited liability company (LLC). A Schedule K-1 (Form 1065) shows your share of business income and losses.
Itâs possible that you could receive both types of Schedule K-1 forms in the same tax year if you run a pass-through business and youâre the beneficiary of an estate. If youâre confused about how to report the income, deductions, credits and other information from either one on your tax return, it may be helpful to get guidance from a tax professional.
The Bottom Line
Receiving a Schedule K-1 tax form is something you should be prepared for if youâre the beneficiary of an estate or trust. Again, whether you will receive one of these forms depends on whether youâre a resident or nonresident alien and the amount of income the trust or estate generates. Talking to an estate planning attorney can offer more insight into how estate income is taxed as you plan a strategy for managing an inheritance.
Tips for Estate Planning
- Consider talking to a financial advisor about the financial implications of inheriting assets. If you donât have a financial advisor yet, finding one doesnât have to be complicated. SmartAssetâs financial advisor matching tool can help you connect with professional advisors in your local area in minutes. If youâre ready, get started now.
- One way to make the job of filing taxes easier is with a free, easy-to-use tax return calculator. Also, creating a trust is something you might consider as part of your own estate plan if you have significant assets you want to pass on.
Photo credit: Â©iStock.com/fizkes, Â©iStock.com/urbazon, Â©iStock.com/dragana991
The post A Guide to Schedule K-1 (Form 1041) appeared first on SmartAsset Blog.