IRA

Serving Southwest Florida

Helping clients plan for their family's future, by creating an efficient, thoughtful and comprehensive estate plan that preserves their legacy and gives them peace of mind.

Charitable Remainder Trusts and IRAs

A Charitable Remainder Trust can solve estate planning issues with Individual Retirement Accounts.  Since the mid-1970s, saving in a tax-deferred employer-sponsored retirement plan has been a great way to save for retirement, while also deferring current income tax. Many workers put some of their paychecks into 401(k)s, which can later be transferred to a traditional Individual Retirement Account (IRA). Others save directly in IRAs.

Kiplinger’s recent article entitled “Worried about Passing Down a Big IRA? Consider a CRT” says that taking lifetime IRA distributions can give a retiree a comfortable standard of living long after he or she gets their last paycheck. Another benefit of saving in an IRA is that the investor’s children can continue to take distributions taxed as ordinary income after his or her death, until the IRA is depleted.

Saving in a tax-deferred plan and letting a non-spouse beneficiary take an extended stretch payout using a beneficiary IRA has been a significant component of leaving a legacy for families. However, the Setting Every Community Up for Retirement Enhancement Act of 2019 (the SECURE Act), which went into effect on Jan. 1, 2020, eliminated this.

Under the new law (with a few exceptions for minors, disabled beneficiaries, or the chronically ill), a beneficiary who isn’t the IRA owner’s spouse is required to withdraw all funds from a beneficiary IRA within 10 years. Therefore, the “stretch IRA” has been eliminated.

However, there is an option for extending IRA distributions to a child beyond the 10-year limit imposed by the SECURE Act: it’s a Charitable Remainder Trust (CRT). This trust provides for distributions of a fixed percentage or fixed amount to one or more beneficiaries for life or a term of less than 20 years. The remainder of the assets will then be paid to one or more charities at the end of the trust term.

Charitable Remainder Trusts can provide that a fixed percentage of the trust assets at the time of creation will be given to the current individual beneficiaries, with the remainder being given to charity, in the case of a Charitable Remainder Annuity Trust (CRAT). There is also a Charitable Remainder Unitrust (CRUT), where the amount distributed to the individual beneficiaries will vary from year to year, based on the changing value of the trust. With both trusts, the amount of the charity’s remainder interest must be at least 10% of the value of the trust at its inception.

Implementing a Charitable Remainder Trust to extend distributions from a traditional IRA can have tax advantages and can complement the rest of a comprehensive estate plan. It can be very effective when your current beneficiary has taxable income from other sources and resources, in addition to the beneficiary IRA.  It can also be effective in protecting the IRA assets from a beneficiary’s creditors or for planning with potential marital property, while providing the beneficiary a lengthy predictable income stream.

Ask an experienced estate planning attorney, if one of these trusts might fit into your comprehensive estate plan.

Reference: Kiplinger (Feb. 8, 2021) “Worried about Passing Down a Big IRA? Consider a CRT”

Administering an Estate

When administering an estate, there are both similarities and differences between wills and trusts.  A last will and testament is used to point out the beneficiaries and trustees and the legal professionals you want to be involved with your estate when you have passed, explains this recent article What You Need To Know About Handling a Will and Trust from Your Dearly Departed Loved One” from North Forty News. If there are minor children in the picture, the last will is used to direct who will be their guardians.

A trust is different than the last will. A trust is a legal entity where one person places assets in the trust and names a trustee to be in charge of the assets in the trust on behalf of the beneficiaries. The assets are legally protected and must be distributed as per the instructions in the trust document. Trusts are a good way to reduce paperwork, save time and reduce estate taxes. It removes the estate from the probate process when administering an estate.

Don’t go it alone. If your loved one had a last will and trust, chances are they were prepared by an estate planning lawyer. The estate planning attorney can help you go through the legal process. The attorney also knows how to prepare for problems in administering an estate such as any possible disputes from relatives.

It may be more complicated than you expect. There are times when honoring the wishes of the deceased about how their property is distributed becomes difficult. Sometimes, there are issues between the beneficiaries and the last will and trust custodians. If you locate the attorney who was present at the time the last will was signed and the trusts created, she may be able to make the process easier.

Be prepared to get organized. There’s usually a lot of paperwork in administering an estate. First, gather all of the documents—an original last will, the death certificate, life insurance policies, marriage certificates, real estate titles, military discharge papers, divorce papers (if any) and any trust documents. Review the last will and trust with an estate planning attorney to understand what you will need to do.

Protect personal property and assets. Homes, boats, vehicles and other large assets will need to be secured to protect them from theft. Once the funeral has taken place, you’ll need to identify all of the property owned by the deceased and make sure they are property insured and valued. If a home is going to be empty, changing the locks is a reasonable precaution. You don’t know who has keys or feels entitled to its contents.

Distribution of assets. If there is a last will, it must be filed with the probate court and all beneficiaries—everyone mentioned in the last will has to be notified of the decedent’s passing. As the executor, you are responsible for ensuring that every person gets what they have been assigned. You will need to prepare a document that accounts for the distribution of all properties, which the court has to certify before the estate can be closed.

Taking on the responsibility of administering an estate is not without challenges. An estate planning attorney can help you through the process, making sure you are managing all the details according to the last will and the state’s laws. There may be personal liability attached to serving as the executor, so you’ll want to make sure to have good guidance on your side.

Reference: North Forty News (Feb. 3, 2021) What You Need To Know About Handling a Will and Trust from Your Dearly Departed Loved One”

 

Selecting Beneficiaries

For many people, selecting beneficiaries occurs when they first set up an account, and it’s rarely given much thought after that. The Street’s recent article entitled “Secure your IRA – Review Your Beneficiary Forms Now” says that many account holders aren’t aware of how important the beneficiary document is or what the consequences would be if the information is incorrect or is misplaced. Many people are also surprised to hear that wills don’t cover these accounts because they pass outside the will and are distributed pursuant to the beneficiary designation form.

If you are remiss in selecting beneficiaries and if one of these accounts does not have a designated beneficiary, it may be paid to your estate. If so, the IRS says that the account has to be fully distributed within five years if the account owner passes before their required beginning date (April 1 of the year after they turn age 72). This may create a massive tax bill for your heirs.

Get a copy of your listed beneficiaries from every institution where you have your accounts, and don’t assume they have the correct information. Review the forms and make sure all beneficiaries are named and designated not just the primary beneficiary but secondary or contingent beneficiary. It is also important to make certain that the form states clearly their percentage of the share and that it adds up to 100%. You should review these forms at any life change, like a marriage, divorce, birth or adoption of a child, or the death of a loved one.

Note that the SECURE Act changed the rules for anyone who dies after 2019. If you don’t heed these changes, it could result in 87% of your hard-earned money to go towards taxes. For retirement accounts that are inherited after December 31, 2019, there are new rules that necessitate review of selecting beneficiaries:

  1. The new law created multiple “classes” of beneficiaries, and each has its own set of complex distribution rules. Make sure you understand the definition of each class of beneficiary and the effect the new rules will have on your family.
  2. Some trusts that were named as beneficiaries of IRAs or retirement plans will no longer serve their original purpose. Ask an experienced estate planning attorney to review this.
  3. The stretch IRA has been eliminated for most non-spouse beneficiaries. As such, most non-spouse beneficiaries will need to “empty” the IRA or retirement account within 10 years and they can’t “stretch” out their distributions over their lifetimes. Failure to comply is a 50% penalty of the amount not distributed and taxes due.

For many selecting beneficiaries, using the beneficiary form is their most important estate planning document but the most overlooked.  Let us help you incorporate selecting beneficiaries into your estate plan.

Reference: The Street (Dec. 28, 2020) “Secure your IRA – Review Your Beneficiary Forms Now”

 

Estate Planning Disasters

The potential of estate planning disasters looms in the near future.  One of the largest wealth transfers our nation has ever seen is about to occur, since in the next 25 years, roughly $68 trillion of wealth will be passed to succeeding generations. This event has unique planning opportunities for those who are prepared, and also big challenges due to the ever-changing legal and tax world of estate planning.

Fox Business’ article “5 estate planning disasters you’ll want to avoid,” discusses the biggest estate planning disasters to avoid.

Failing to properly name beneficiaries. This common estate planning mistake is easily overlooked, when setting up a retirement plan for the first time or when switching investment companies. A big advantage of adding a beneficiary to your account, is that the account will avoid probate and pass directly to your beneficiaries.

Any account with a properly listed beneficiary designation will override what is written in your will or revocable living trust. Therefore, you should review your investment and bank accounts to make certain that your beneficiaries are accurate and match your intentions.

Naming a minor as a beneficiary. This can be an estate planning disaster, if they are still minors when you die. A minor won’t have the legal authority to take control of inheritance or investment accounts until they reach the age of 18 or 21 (depending on state law). When a minor receives an asset as a beneficiary, a court-appointed guardianship will be created to supervise and manage the assets on behalf of the minor. To avoid this mistake, you can name a guardian for the minor child in your will.

Forgetting to fund a trust. Creating a trust is the first step, but many people don’t properly fund their trust after it’s established.  If you don’t transfer your assets to the trust, they will have to go through probate – a serious estate planning disaster.

Making a tax mess for your heirs. A significant advantages of passing on real estate or other highly appreciated investments or property, is that your beneficiaries receive what is known as a “step-up” in basis, so that they aren’t responsible for any income taxes on the appreciated assets when they are received. The exception is when inheriting retirement accounts, such as 401k’s and traditional IRAs. Except for a surviving spouse, inheriting a traditional IRA or 401k means that you are now responsible for the taxes owed. With the recent passage of the SECURE Act, most non-spouse beneficiaries must totally withdraw a 401k or IRA within 10 years. It is deemed to be ordinary income for beneficiaries, which could result in a huge tax bill for your heirs. To avoid this, you can convert some or all of your retirement account assets to a Roth IRA during your lifetime, which lets you to pay the conversion taxes at your current income tax rate—a rate that may be much lower than your children or grandchildren’s tax rate. When you pass away, any money that is passed inside a Roth IRA goes tax-free to your heirs, avoiding an estate planning disaster.

Failing to create a comprehensive estate plan. Properly establishing your estate plan now, will care for your loved ones financially, and can also save them a lot of emotional stress after you’re gone.

Talk to an experienced estate planning attorney about planning now. It can really affect your family for generations. It is one of the best gifts that you can leave your family.

Reference: Fox Business (Nov. 12, 2020) “5 estate planning disasters you’ll want to avoid”

The Biggest Estate Planning Mistakes

Heirs who are prepared to inherit wealth, with families who talk about wealth and have an estate plan, will do better than those who do not, says the West Haven Observer’s recent article “5 Estate planning disasters you’ll want to avoid.” A constantly changing legal and tax environment presents significant challenges, but a few simple steps may save your beneficiaries from the expense and stress of these common estate planning mistakes.

  1. Not designating beneficiaries properly. This is one of the most common estate planning mistakes, and one that cannot always be fixed. It’s easy to forget whose name you put on a pension or life insurance plan thirty years ago. However, failing to check those beneficiaries, especially if your life has undergone big changes, can lead to the wrong people enjoying the proceeds.

Using beneficiary designations is an excellent way to bypass the process of probate, since assets that pass this way are not subject to probate. Depending upon where you live, probate can be a long, drawn out process. A beneficiary designation is far simpler and more efficient.

Failing to name a beneficiary when setting up bank accounts, opening CDs, and savings accounts is a common error. This can be fixed by making these accounts “TOD,” or Transfer on Death, and the account goes directly to your beneficiary.

Your will does not control any beneficiary designations. That’s why this step is so important.

2-Designating a minor as a beneficiary. You love your grandchildren, but unless they are adults, they cannot inherit assets until they are 18 or 21, depending on the laws of your state. If a minor does receive an asset, the court appoints a guardian to supervise and manage the assets. Your estate planning attorney will advise you on your individual situation, but one alternative is to list a guardian for the minor child inside the will, so the court appoints the person who you choose to manage the property until the child becomes of age.

Another means of providing for young children or grandchildren is to create a trust. The trust names a trustee who is usually a trusted friend or relative who is knowledgeable and responsible. They manage the assets on behalf of the child. The trust also permits assets to pass without probate.

3-Failing to fund a trust. All too often, this estate planning mistake is the weak link that breaks the estate. Placing assets within the trust is called funding. Usually this means changing the ownership of bank accounts or real estate from being owned by an individual to being owned by the trust. If the trust is not funded and the will has instructions that seemingly contradict the trust, the asset will need to go through probate and the trust instructions will be ignored.

4-Leaving a tax nightmare for heirs. One of the many advantages of passing on real estate or other assets that appreciate that beneficiaries get a “step up” in basis. That means the heirs are not responsible for any income taxes on the appreciated assets. This can be a very big benefit. There are exceptions—inherited IRAs and 401(k)s don’t have this advantage. However, the recent passage of the SECURE Act has taken away many tax benefits for IRA heirs. Most non-spouse beneficiaries must fully withdraw the entire amount from the IRA or 401(k) within ten years, and the withdrawal is considered ordinary income. It could leave your heirs with a huge, unexpected tax bill.

There is a workaround. By converting some or perhaps all of your retirement accounts to a Roth IRA during your lifetime, you can pay the taxes when converting the IRA to a Roth IRA at your current tax rate, which may be lower than your children or grandchildren’s rate. When you die, any money in the Roth IRA goes to heirs completely tax free.

5-The biggest estate planning mistake of all is not having an estate plan. Thinking about your legacy plan, mortality and incapacity is not fun for anyone. However, by spending the time and resources in creating an estate plan, you spare your loved ones from an inordinate amount of stress and expenses, which they will appreciate. One of the best gifts you can give your loved ones is a well-thought out, properly created and executed estate plan.

Let us help you avoid estate planning mistakes.

Reference: West Haven Observer (Nov. 12, 2020) “5 Estate planning disasters you’ll want to avoid”

 

How to Catch Up on Retirement Savings

Many workers need to catch up on retirement savings because they haven’t created any plans to save for their retirement. However, you can start turning that situation around now. Money Talks News’ recent article entitled “The 7 Fastest Ways to Catch Up on Retirement Savings” says that, even if you can’t add to retirement savings at the moment, here are some ideas to plan for how you’ll address this shortfall, when you’re back on your feet financially.

Review your budget. If you need more money for retirement savings, change your budget. Make certain that all your money is identified and working for you. Reduce or cut expenses that prevent you from achieving goals.

“Catch up” your 401(k). If you are over 50, take advantage of the ‘catch-up contribution’ in your 401(k). In 2020, the base limit for contributions to workplace retirement accounts is $19,500. In addition, starting at age 50, workers with a 401(k) plan can contribute an extra $6,500 per year. If you have an IRA — either traditional or Roth — you can contribute $6,000, plus an extra $1,000 beginning at age 50.

Leverage all investment opportunities. When you invest in your 401(k), put enough in to at least get any full employer matching funds. There are also employers that match contributions to a health savings account, which can be a great hidden way to save for retirement. You can also maximize IRA contributions (Roth or traditional), depending on what is possible given your income. Any money left over can be invested it in a taxable account.

Bolster your earnings. If you’re behind in saving for retirement, you might need to boost your earnings more quickly. To earn more income, consider changing jobs, get training to update your skills, or finding a side gig. If income doesn’t grow over time, it’s hard to have savings strategies accelerate retirement success.

Be wise with raises and windfalls. When you get a raise, split the amount and put half in a checking account and half toward retirement savings.

Minimize your spending. This can be the toughest part, but it’s also perhaps the most important. Reducing spending increases your savings, and it also teaches you to live with less. If you learn to live more modestly, you won’t need to save as much to continue your lifestyle in retirement. If you’re unsure where all your money is going, monitor your spending. List all the expenses and track them over time. When you know where your money is going, you’ll have the information needed to determine if there are places where spending can be diverted to savings.

Make a “mortgage payment” after the house is paid off. If you’ve worked hard to pay off the mortgage, save the money that was budgeted for the house. Save it in an investment account to use for retirement spending. Do the same when you pay off a car loan and watch your wealth grow.  We can help you with your estate planning in retirement.

Reference: Money Talks News (Oct. 8, 2020) “The 7 Fastest Ways to Catch Up on Retirement Savings”

 

Five Ways to Protect Your Estate

One of the prime goals of estate planning is to protect your estate.  It is true that a single person who dies in 2020 could have up to $11.58 million in personal assets and their heirs would not have to pay any federal estate tax. However, that doesn’t mean that regular people don’t need to worry about estate taxes—their heirs might have to pay state estate taxes, inheritance taxes or the estate may shrink because of other tax issues. That’s why U.S. News & World Report’s recent article “5 Estate Planning Tips to Keep Your Money in the Family” is worth reading.

Without proper planning, any number of factors could take a bite out of your children’s inheritance. They may be responsible for paying federal income taxes on retirement accounts, for instance. You want to be sure that a lifetime of hard work and savings doesn’t end up going to the wrong people.

The best way to protect your estate, your family and your legacy, is by meeting with an estate planning attorney and sorting through all of the complex issues of estate planning. Here are five areas you definitely need to address:

  1. Creating a last will and testament
  2. Checking that beneficiaries are correct
  3. Creating a trust
  4. Converting traditional IRA accounts to Roth accounts
  5. Giving assets while you are living

A last will and testament. Only 32% of Americans have a will, according to a survey that asked 2,400 Americans that question. Of those who don’t have a will, 30% says they don’t think they have enough assets to warrant having a will. However, not having a will means that your entire estate goes through probate, which could become very expensive for your heirs. Having no will also makes it more likely that your family will challenge the distribution of assets. As a result, someone you may have never met could inherit your money and your home. It happens more often than you can imagine.

Checking beneficiaries. Once you die, beneficiaries cannot be changed. That could mean an ex-spouse gets the proceeds of your life insurance policy, retirement funds or any other account that has a named beneficiary. Over time, relationships change—make sure to check the beneficiaries named on any of your documents to ensure that your wishes are fulfilled. Your will does not control this distribution and is superseded by the named beneficiaries.

Set up a trust. Trusts are used to accomplish different goals. If a child is unable to manage money, for instance, a trust can be created, a trustee named and the account funded. The trust will include specific directions as to when the child receives funds or if any benchmarks need to be met, like completing college or staying sober. With an irrevocable trust, the money is taken out of your estate and cannot be subject to estate taxes. Money in a trust does not pass through probate, which is another benefit of protecting your estate.

Convert traditional IRAs to Roth retirement accounts. When children inherit traditional IRAs, they come with many restrictions and heirs get the income tax liability of the IRA. Regular income tax must be paid on all distributions, and the account has to be emptied within ten years of the owner’s death, with limited exceptions. If the account balance is large, it could be consumed by taxes. By gradually converting traditional retirement accounts to Roth accounts, you pay the taxes as the accounts are converted. You want to do this in a controlled fashion, so as not to burden yourself. However, this means your heirs receive the accounts tax-free.

Gift with warm hands, wisely. Perhaps the best way to ensure that money stays in the family, is to give it to heirs while you are living. As of 2020, you may gift up to $15,000 per person, per year in gifts. The money is tax free for recipients. Just be careful when gifting assets that appreciate in value, like stocks or a house. When appreciating assets are inherited, the heirs receive a step-up in basis, meaning that the taxable amount of the assets are adjusted upon death, so some assets should only be passed down after you pass.

Let us help your protect your estate.

Reference: U.S. News & World Report (Sep. 30, 2020) “5 Estate Planning Tips to Keep Your Money in the Family”

Sharing Your Inheritance

Sharing your inheritance doesn’t sound like a bad idea, right?

However, Morningstar’s recent article entitled “3 Strategies to Consider When Sole Beneficiaries Want to Share the Wealth” says that there are a few hurdles to clear, such as the IRA administrator’s policies, income tax consequences, transfer tax consequences and the terms of the decedent’s will.

Here’s a scenario: Uncle Buck dies and leaves his IRA to his niece, Hope. Buck’s will leaves all his other assets equally to all three of his nieces: sisters Hope, Faith and Charity. However, the three agree that Buck’s IRA should be shared equally, like the rest of the estate. What do they do?

The Easy Way. Hope keeps the IRA, withdraws from it when she wants (and as required by the minimum distribution rules), pays the income tax on her withdrawals and makes cash gifts to Faith and Charity (either now or as she withdraws from the IRA) in an agreed upon the amount. It would mean giving her two sisters ⅓ of the after-tax value of the IRA. There is no court proceeding or issue with the IRA provider. There are no income tax consequences because Hope will pay the other girls only the after-tax value of the IRA distributions she receives. However, there’s a transfer tax consequence: Hope’s transfers would be considered as gifts for gift tax purposes because she has no legal obligation to share the IRA with the other nieces. Any gift over the annual exclusion amount in any year ($15,000 as of 2020) will be using up some of Hope’s lifetime gift and estate tax exemption. This easy method sharing your inheritance may work well for a not-too-large inherited IRA.

The Expensive Method: Reformation. If there is evidence that Buck made a mistake in filling out the beneficiary form, a court-ordered reformation of the document may be appropriate. Therefore, if Hope, Faith, and Charity have witnesses who would testify that the decedent told them shortly before he died, “I’m leaving all my assets equally to my three nieces,” it could be evidence that he made a mistake in completing the beneficiary designation form for the IRA. The court could order the IRA provider to pay the IRA to all three girls, and the IRS would probably accept the result. By accepting the result, the IRS would agree that the nieces should be equally responsible for their respective shares of income tax on the IRA and for taking the required distributions, and that no taxable gift occurred. However, as you might expect, the IRS isn’t legally bound by a lower state court’s order. If the reformation is based on evidence, the parties may want the tax results confirmed by an IRS private letter ruling, which is an expensive and time-consuming task.

The In-Between. The final possible solution for sharing your inheritance is a qualified disclaimer. Hope would “disclaim” two thirds of the IRA (and keep a third). A qualified disclaimer (made within nine months after Buck’s death) would be effective to move two thirds of the IRA (and the income taxes) from Hope without gift taxes. A qualified disclaimer involves a legal fee but no court or IRS involvement. As a result, it can be fairly simple and cost-effective. However, there may be an issue: when Hope disclaims two thirds of the IRA, that doesn’t mean the disclaimed share of the IRA automatically goes to the other nieces. Instead, the disclaimed portion of the IRA will pass to the contingent beneficiary of the IRA. Hope needs to see where it goes next, prior to signing the disclaimer. If there’s no contingent beneficiary named by Buck, the disclaimed portion will pass to the default beneficiary named in the IRA provider’s plan documents. That’s typically the decedent’s probate estate. If the disclaimed portion of the IRA passes to the uncle’s estate, and Hope is a one-third beneficiary of the estate, she will also need to disclaim her estate-derived share of the IRA. A “simple disclaimer” can be complicated, so ask an experienced estate planning attorney to help.

Even if Hope disclaims two thirds of the IRA, so that it passes to Faith and Charity through the estate, the other girls won’t receive as favorable income tax treatment as Hope. Hope inherits her share as designated beneficiary, while an estate (the assumed default beneficiary), which isn’t a designated beneficiary, can’t qualify for that.

Reference: Morningstar (Aug. 13, 2020) “3 Strategies to Consider When Sole Beneficiaries Want to Share the Wealth”

Suggested Key Terms: Estate Planning Lawyer, Wills, Probate Court, Inheritance, Asset Protection, Probate Attorney, Estate Tax, Gift Tax, Unified Federal Estate & Gift Tax Exemption, Beneficiary Designations, Required Minimum Distribution (RMD), Tax Planning, Financial Planning, IRA