What You Should Know about Inherited IRAs

October 16, 2023

Here’s what you should know about inherited IRAs. Inheriting an Inherited IRA can be even more complicated than the already complex world of inherited Individual Retirement Accounts (IRAs). Understanding the rules and regulations about inheriting an inherited IRA is critical to avoid major tax pitfalls, according to a recent article from yahoo! finance, “What Happens When I inherit an Annuity?”

After the passage of the SECURE Act, the rules concerning inherited IRAs became quite restrictive. Working with an estate planning attorney knowledgeable about IRAs can be the difference between a healthy inheritance or an unexpected huge tax liability.

An inherited IRA is an IRA left to a beneficiary following the death of the original account owner. The beneficiary who inherits the IRA can pass it to a successor beneficiary upon death. This creates the “inheriting an inherited IRA” scenario.

If the line of succession is not set up correctly, there is the potential for inherited assets to go through probate for a judge to rule on the rightful owner.

The original beneficiary is the first person to inherit the IRA. Once they have inherited the account, they may name their successor beneficiary. There are rules for the original beneficiary and the successor beneficiary.

The SECURE Act changed the timeline for inherited IRAs. It eliminated the “stretch” IRA strategy, which allowed beneficiaries to take distributions over their lifetime, stretching out the tax-deferred growth of the IRA over decades. Now, most non-spouse beneficiaries must withdraw all assets from an inherited IRA within ten (10) years of the original account holder’s death. This change presents new implications with regard to taxes, especially if the beneficiary is in their peak earning years.

Inheriting an inherited IRA can involve complex tax rules and pitfalls. There are timelines for taking required withdrawals and zero flexibility for mistakes.

You’ll also need to be sure the inheritance is documented correctly to avoid potential probate.

The rules differ for spouses inheriting an IRA since they shared assets with their deceased spouse. The SECURE Act allows spouses to treat the IRA as their own, providing more flexibility in distributions and potential tax implications.

Understanding the concept of Year of Death Required Distributions is essential. Let’s say the original owner was over a certain age at death. In this situation, a Required Minimum Distribution (RMD) may need to be taken in the year of death, which could impact the heir’s taxes for that year.

Knowing potential tax breaks related to inherited IRAs will also help with financial management. Non-spouse beneficiaries can deduct the estate tax paid on IRA assets when calculating their income tax.

These are complex issues requiring the help of an experienced estate planning attorney. Ideally, the attorney will help you understand what you should know about inherited IRAs. This conversation should occur while creating or revising your estate plan. If you would like to learn more about IRAs, please visit our previous posts.

Reference: yahoo! finance (Sep. 5, 2023) “What Happens When I inherit an Annuity?”

Immediate Annuity might be a useful Option for Retirees

October 12, 2023

An immediate annuity might be a useful option for retirees who want to add funds for ongoing expenses or are concerned about outliving their savings. They can provide a sense of security during volatile markets. However, the downsides must be considered.

An immediate annuity is, in simplest terms, an insurance plan created with a lump sum payment designed to pay a guaranteed amount for a set period. In the first quarter of 2023, sales hit $3.3 billion in the first quarter of 2023, as reported in a recent article from U.S. News & World Report, “The Pros and Cons of Immediate Annuities.” This figure, representing single premium annuities, increased by 120% for this segment from the first quarter of 2022.

Set up as an insurance plan, an immediate annuity is funded with an initial amount, and payouts begin. The funds might come from savings accounts, a 401(k) or an IRA. The tradeoffs are in the form of fees and growth limitations on the total assets if you decide to cancel the payments and retain the account balance.

Other types of annuities may be more appropriate, including deferred annuities, where the money is invested, and payouts begin later. These are useful for individuals who want market protection and have only an occasional or reasonable need for cash.

When purchasing an immediate annuity, the insurer will look at factors including the annuitant’s age and how long the payments will last. From an income perspective, you can calculate your fixed expenses and use this amount to determine your needed income.

Some annuities include a rising income stream to keep pace with inflation.

An immediate annuity might be a useful option for retirees. Payouts depend on the timeline and details of each annuity. In many cases, you can start getting payouts within a month of the deposit. However, usually you have to take it within the first 12 months. You can also ask to have payments made monthly, quarterly, or annually. You’ll also select a payout period, which may consist of a certain number of years or for the rest of your life. Many people prefer the lifetime annuity plan, meaning their payments will continue for as long as they live. If you would like to learn more about annuities in estate planning, please visit our previous posts.

Reference: U.S. News & World Report (Sep. 5, 2023) “The Pros and Cons of Immediate Annuities”

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Estate Planning can be a Powerful Part of a Financial Strategy

October 10, 2023

Estate planning can be a powerful part of a financial strategy to ensure the smooth transfer of assets to the next generation while yielding significant tax savings, as explained in a recent article, “Maximizing wealth: The power of strategic estate planning in tax savings” from Thomasville Times-Enterprise.

Estate planning generally involves arranging assets and personal affairs to facilitate an efficient transfer to beneficiaries. However, there’s a tax angle to consider. Estates are subject to various taxes, including estate, inheritance and capital gains taxes. Without a good estate plan, taxes can take a big bite out of any inheritance.

Using tax-free thresholds and deductions effectively is one way to save on taxes. Depending upon your jurisdiction, there may be a state estate tax exemption in addition to the federal estate tax exemption. By strategically distributing assets to beneficiaries or using trusts, individuals can keep the value of their estate below these thresholds, leading to reduced or eliminated estate taxes.

Equally important is planning to take advantage of allowable deductions, further decreasing the tax burden facing heirs.

Trusts are valuable tools for estate and tax planning. They offer a legal framework to hold and manage assets to benefit individuals or organizations and provide asset protection and tax advantages. A revocable living trust transfers assets seamlessly to beneficiaries without passing through probate. Irrevocable trusts shield assets from estate taxes while allowing the person who created the trust—the grantor—to direct their distribution when the trust is established.

Strategic gifting during one’s lifetime is another way wealth is transferred. Using the annual gift tax exclusion, you may gift a certain amount per person yearly without triggering gift taxes. This allows for the gradual transfer of assets, reducing the taxable estate while helping loved ones. Gifting appreciated assets can result in significant capital gains tax savings for both the person making the gift and the recipient.

Estate planning is necessary for business owners to protect a family business from being stripped of capital because of hefty estate taxes. Different ownership structures, including a Family Limited Partnership (FLP) or a Limited Liability Company (LLC) can facilitate the smooth transition of the business to the next generation, while using valuation discounts to reduce estate tax liabilities further.

Estate planning can be a powerful part of a financial strategy. Given the complexity of estate and tax laws, working with an experienced estate planning attorney, accountant, and financial advisor is essential to ensure that all aspects of an estate plan meet legal requirements. Every situation and every family is different, so the estate plan needs to be designed to meet the unique needs of the individual and their family. If you would like to learn more about tax planning, please visit our previous posts.

Reference: Thomasville Times-Enterprise (Sep. 3, 2023) “Maximizing wealth: The power of strategic estate planning in tax savings”

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‘Pour-Over’ Will is vital to a Revocable Trust

October 9, 2023

A revocable living trust gives a married couple or individual the power to direct what should happen after they die to assets and possessions placed within a Revocable Trust. The trust also indicates who should be in charge of carrying out these instructions without the involvement of a probate court judge, explains a recent article, “How does a Pour-Over Will work?” from Coeur d’Alene/Post Falls Press. A ‘Pour-Over’ Will is vital to a Revocable Trust.

A Last Will and Testament, referred to as a “will,” is the traditional document that leaves instructions about what you want to happen to your assets when you die and includes the name of your executor, the person you want to carry out your wishes. If you have a will, do you still need a trust? Probably.

A Revocable Living Trust will only concern the specific assets and possessions you’ve placed into the trust. This is known as “funding the trust.” When the trust is first established, your estate planning attorney will help you with the steps needed to ensure that assets are retitled so they are owned not by you but by the trust.

As time passes, if you acquire new assets or possessions, you might forget to have them placed in the trust. This is a common oversight and can have major implications for the success of your overall estate plan.

If you die and there are assets outside of the trust, they will likely need to go through the court-controlled probate process. You were trying to avoid this in the first place by establishing a trust.

If you don’t have a will, these assets will be distributed according to state law instead of your wishes.

There is a solution—the Pour-Over Will.

A Pour-Over Will is a little different than a traditional will. It includes specific instructions to place any assets not placed inside your trust into the trust as soon as possible. This type of will still has to go through probate, but probate will only apply to assets left out of the trust and can typically be probated less formally.

A ‘Pour-Over’ Will is vital to a Revocable Trust. While the goal in using a Revocable Trust is to avoid probate completely, the Pour-Over Will is an important “just in case” document to have if you have Trusts.

Parents of minor children have yet another reason to have a Pour-Over Will, even when there is a Revocable Living Trust. A will is used to name the person or people you want to serve as guardians for your minor children, if both parents are deceased. Leaving this decision to be made by the court rather than by you is something to be avoided at all costs. If you would like to learn more about revocable living trusts, please visit our previous posts.

Reference: Coeur d’Alene/Post Falls Press (Sep. 10, 2023) “How does a Pour-Over Will work?”

Do You Need a Will or Trusts or Both?

October 5, 2023

A comprehensive estate plan is the best way to protect yourself during your lifetime and your family after you’ve passed. For many people, it’s tempting to think a simple will is all they need, as reported in a recent article, “Is a Will Really the Best Way to Pass an Inheritance to Your Family?” from The Motley Fool. This might be true if your estate is relatively small. However, there are good reasons to consider using a trust or other estate planning strategies. Do you need a will or trusts or both?

A last will and testament is a binding document to allocate assets after death, assign guardianship for minor children, name an executor to manage your estate and convey other last wishes.

However, there are other considerations to an estate plan, including taxes, special needs of heirs and how quickly you want assets and property to be transferred. Your estate planning attorney can discuss how best to accomplish your goals once they are articulated.

One of the challenges of having only a will is probate. This court process authenticates a will and gives the named executor the power to manage the estate and eventually distribute assets. Probate can be a long, costly and public process when assets are unavailable to heirs.

In some jurisdictions, probate is a matter of months. In others, it can be years before probate is completed if the estate is complicated.

Most people don’t know this, but wills in probate become part of the public record. Anyone can see everything in your will, including who you leave property to and how much they receive.

An alternative is the living trust. This document establishes a legal entity to hold assets during your lifetime. The trustee can be yourself and a secondary trustee. The trustee administers the trust according to your wishes, which are established in the language of the trust.

Depending upon your state, your estate planning attorney can put a provision moving assets into the trust after your death, in case any asset is accidentally forgotten and not moved into the trust.

Living trusts are also revocable, meaning they can be amended or revoked at any point during your lifetime. This provides a great deal of flexibility.

Joint ownership is another option used mainly by married spouses. Joint Tenancy with Right of Survivorship (JTWRS) is a popular way to own property. Assets owned jointly transfer directly to the surviving spouse (or joint owner) without the need for probate.

So, do you need a will or trusts or both? Just as everyone’s life is different, everyone’s estate plan is different. State law varies, and the size and complexity of your estate will influence how your estate plan is structured. Your best bet might be a mixture of wills, trusts and joint ownership arrangements. An experienced estate planning attorney can create a comprehensive estate plan to suit your and your family’s needs. If you would like to learn more about wills and trusts. please visit our previous posts.

Reference: The Motley Fool (September 4, 2023) “Is a Will Really the Best Way to Pass an Inheritance to Your Family?”

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Using an Annuity in your Planning to distribute Income

October 3, 2023

When the economy tanked in 2008, retirees watched in horror as U.S. markets suffered historic losses. The Dow declined by more than 50%, its biggest drop since the Great Depression of 1929. Kiplinger’s article entitled, “An Annuity Can Help Restore Your Confidence in Retirement,” says that the oldest Baby Boomers, who are in or nearing retirement as things were at their worst, watched as their nest eggs cracked wide open and lost thousands of dollars — in some cases hundreds of thousands. Using an annuity in your planning to distribute income is a way to overcome market losses — or to avoid them altogether.

Most of them were left with two choices: (i) either keep working past the age they’d planned to retire or (ii) retire with a lifestyle that was significantly less than what they’d envisioned. Under both scenarios, they could struggle to piece back together the plans they once had. And time wasn’t on their side.

Pre-retirement is a horrible time to experience significant market loss. That’s because there’s often little time left for recovery. You need that nest egg you accumulated to generate income when the paychecks stop. If it shrinks, so will the amount of income you’ll get.

That’s why it’s important to consider market volatility and why you should start pulling back from risk as you get older. The markets will always move up and down. Given today’s domestic and worldwide uncertainty, some loss seems almost unavoidable.

However, there are distribution strategies that can help give you an edge in overcoming a loss.

For the average retiree, one way to help distribute retirement income is not by putting hope in the market but by using an actuarial-designed product, such as an annuity. With an annuity, distribution amounts are mostly calculated based on your age and life expectancy. The older you are, the more you get paid.

It can also offer you the confidence that you will be able to enjoy your well-earned retirement through the protection of the principal and regular income streams.

It is important to know that annuities have surrender charges, making them a non-liquid asset.

Annuities also have fees and can restrict your ability to participate in market gains, even with products such as fixed index annuities. However, some retirees enjoy the comfort of a steady income and the protection benefits annuities offer.

Using an annuity in your planning to distribute income can be a lifeline in your sunset years. Most traditional immediate annuities are fairly straightforward after you’ve made the purchase. However, you’ll want to work with an experienced estate planning attorney to lock down what’s an appropriate product for you and review any changes to your goals or financial situation as you age. If you would like to learn more about annuities, please visit our previous posts.

Reference: Kiplinger (May 9, 2017) “An Annuity Can Help Restore Your Confidence in Retirement”

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Which Trust, Revocable or Irrevocable?

September 27, 2023

Kiplinger’s recent article entitled, “What to Consider When Deciding Between a Revocable and Irrevocable Trust,” explains that, as a legal entity, a trust can own assets such as real estate, brokerage accounts, life insurance, cars, bank accounts and personal belongings, like jewelry. Yet, which trust should you consider, revocable or irrevocable?

You transfer over the title and ownership of these assets to the trust. The instructions state what should happen to that property after you die, including who should receive it and when.

A revocable trust keeps your options open. As the grantor, you can change or revoke the trust anytime. This includes naming a different trustee or beneficiary. This gives you leverage over the inheritance. If your beneficiary doesn’t listen to you, you can still change the terms of the trust. You can also even take your assets back from a revocable trust. There are typically no tax consequences for doing so because only after-tax assets can be placed in a trust while you’re alive.

If a revocable trust seems much like owning the assets yourself, that’s because there’s really little difference in the eyes of the law. Assets in your revocable trust still count as part of your estate and aren’t sheltered from either estate taxes or creditors. However, it’s a smoother financial transition if something happens to you. If you die or can no longer manage your financial affairs, your successor trustee takes over and manages the trust assets according to your directions in the trust documents.

The second reason to have a revocable trust is that the trust assets bypass probate after you die. During probate, a state court validates your will and distributes your assets according to your written instructions. If you don’t have a will, your property is distributed according to state probate law. If you own homes in multiple states, your heirs must go through probate in each one. However, if that real estate is in a revocable trust, your heirs could address everything in your state of residence and receive their inheritance more quickly.

The contents of your revocable trust also remain private and out of bounds, whereas estates that go through probate are a matter of public record that anyone can access.

An irrevocable trust is harder to modify, and even revocable trusts eventually become irrevocable when the grantor can no longer manage their own financial affairs or dies. To change an irrevocable trust while you’re alive, the bar is high but not impossible to overcome. However, assets in an irrevocable trust generally don’t get a step up in basis. Instead, the grantor’s taxable gains are passed on to heirs when the assets are sold. Revocable trusts, like assets held outside a trust, do get a step up in basis so that any gains are based on the asset’s value when the grantor dies.

It is a wise idea to work with an estate planning attorney who will help you consider which trust you should use, a revocable or irrevocable kind. If you would to read more about trusts, please visit our previous posts.

Reference: Kiplinger (July 14, 2021) “What to Consider When Deciding Between a Revocable and Irrevocable Trust”

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Ways to use a No-Contest Clause in your Planning

September 25, 2023

There are different ways to defend a last will and testament from a claim filed by an individual or a group of individuals who want to alter the terms you put into your will. One way is to hope your executor or, if the issue concerns a trust, your trustee, can effectively defend your choices, says a recent article from Kiplinger, “What Do No-Contest Clauses Have to Do With Undue Influence?” Another is to include a no-contest clause, which would disinherit all heirs if they lose their challenge or for even filing a challenge in the first place. There are ways to use a no-contest clause in your planning.

A no-contest clause can be a strong deterrent for a beneficiary who believes they are entitled to more than the amount provided if they know that just by filing a challenge, they’ll forfeit their share. However, it may not be powerful enough for someone completely omitted from the estate plan altogether. Many estate planning attorneys recommend leaving something for even a disliked heir to give them a reason not to challenge the will.

There are more reasons than disgruntled heirs to have a no-contest clause in your will. A no-contest clause can help if your will omits any heirs at law not specifically mentioned in the document or revoke the share provided for anyone seeking to claim a share in your estate, increase their share, or claim certain assets in your estate.

A no-contest clause is also useful if an heir is trying to invalidate your will, or any provision in it or to take part of your estate in a way not specifically described in your last will and testament.

Many no-contest clauses treat a challenger as having predeceased you or having predeceased you leaving no heirs, thereby passing their share according to other terms in the document. In certain states, it is very important to include a specific direction as to what should happen to these forfeited shares. Your estate planning attorney will know how your state’s laws work and how best to include this language in your will.

However, what if the person challenging the will has a good reason to do so? For instance, numerous cases have been brought to court because probable cause existed where the decedent was subjected to undue influence and even elder abuse by a caregiver or a relative in charge of their finances.

In many cases, family members only learn of the abuse after discovering the depletion of the estate and the admission of a new last will to favor the elder abuser over the decedent’s family. The no-contest clause could cause a complete disinheritance for a family member seeking to protect the estate and any other heir who appears in court to support the petition.

Not all states treat the no-contest clause the same. Some refuse to enforce them as a matter of public policy. Others strictly construe the clause because they disfavor any forfeitures. Your estate plan should be created with a no-contest clause aligning with the laws of your state. Your estate planning attorney will explain the ways to use a no-contest clause in your planning, and create a will designed to avoid punishing a challenge brought in good faith. If you would like to learn more about no-contest clauses, please visit our previous posts.

Reference: Kiplinger (Sep. 1, 2023) “What Do No-Contest Clauses Have to Do With Undue Influence?”

How Parents can Help Children Buy a Home

September 6, 2023

The Millennial generation has come of age, and Generation Z is following right behind them. Kiplinger’s recent article, “Four Ways Parents Can Help Kids Be First-Time Home Buyers,” discusses how parents can help their children buy a home in this landscape of high real estate prices and rising interest rates.

Lend them the money as an intrafamily loan. One strategy is to act as your children’s “bank” and lend them the money. This is known as an intrafamily loan. By serving as their lender, you skip their having to meet banks’ asset and income requirements. However, to avoid gift tax implications, parents should formalize the loan with a promissory note and charge a minimum interest rate called the applicable federal rate (AFR).
Use an intrafamily loan in another way. Another way parents could help by using this intrafamily loan strategy is to provide strategic funding when needed. A borrower on a mortgage who doesn’t put down a 20% down payment would likely need to purchase mortgage insurance, which could be expensive. So, instead of the child incurring that additional fee, the parent could issue an intrafamily note for the gap amount in the down payment. Regarding tax consequences, as the lender of an intrafamily loan, the parent would have to report income on the interest earned on the note.
Give money as a gift. Parents may want to give their children the money toward the home. If so, they can use a gifting strategy called the annual exclusion gifting. Each year, an individual may give up to the annual gift tax exclusion amount to any individual without tax consequences. That amount is currently $17,000 per year and, if left unused, can’t be carried over to the following year. The amount is available per recipient, so if you have more than one child, you could give up to $17,000 yearly to each child. If the parent is married, both spouses together could gift $34,000 per year for each child. This could be used as an outright gift or in the form of loan forgiveness.

Parents may also opt to forgive some of the note’s principal over time by utilizing the balance of the annual exclusion gift yearly or, for a larger amount, the lifetime gift exemption. But unlike the annual exclusion, the lifetime gift exemption is cumulative from year to year and applies to all recipients. The federal lifetime gift exemption is now $12.92 million per person or $25.84 million for a married couple. Still, it’s scheduled to decrease to $5 million (or $10 million for a married coupled), indexed for inflation, starting in 2026.

Co-sign a loan. Another way a parent can help is to act as a guarantor or co-signer on a loan. So, a parent can help a child who may not have established credit and, in some cases, may also help secure better terms on the loan. But if the child fails to make timely payments, the parent could be contractually obligated under the loan terms.

There are options for how parents can help their children buy a home in this difficult financial climate. Speak with your estate planning attorney about these options and if they are a good choice for your family. If you would like to learn more about real property and estate planning, please visit our previous posts.

Reference: Kiplinger (June 27, 2023) “Four Ways Parents Can Help Kids Be First-Time Home Buyers”

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Cancelling Irrevocable Trust can cause Tax nightmare

September 5, 2023

Cancelling an irrevocable trust can cause a tax nightmare. For those in the high-income bracket, the potential tax consequences of canceling an irrevocable trust could be a major deterrent. And for those from middle-income backgrounds, the immediate financial impact, like the possible loss of income from the trust, the ramifications may be more, says Yahoo Finance’s recent article entitled, “Will Terminating an Irrevocable Trust Affect My Taxes?”

For example, if the trust holds significantly appreciated assets like real estate or vintage cars, the beneficiaries could face a large tax bill upon dissolution and may benefit from an alternative strategy. So, instead of dissolving the trust, it might be worth looking at ways to alter it better to fit the beneficiaries’ current needs and circumstances. This may include decanting—moving assets from one trust to another with more favorable terms— or moving the trust to a state with more favorable laws.

Income Taxes. An irrevocable trust may hold assets that generate income, including bank accounts, bonds, and dividend-paying stocks whose profits are taxed as ordinary income. Note that distributions from a trust’s principal aren’t subject to income taxes – only the gains. But if an irrevocable non-grantor trust is terminated, the income the assets have generated will presumably be distributed to the beneficiaries. It will be their responsibility to pay the taxes on the money. However, if the trust that’s dissolved is a grantor trust, the income tax liability will stay with the person who created the trust.

Capital Gains Taxes. Assets that appreciate within an irrevocable trust are subject to capital gains taxes. When these profits are realized and distributed at the termination of a trust, the beneficiaries will be required to pay the tax rate that corresponds with their income level.

Estate Taxes. When assets are transferred to an irrevocable trust, they’re removed from the grantor’s taxable estate, lowering the person’s potential estate tax liability when they die. Only large estates worth more than $12.92 million are subject to the federal estate tax in 2023, so it’s not an issue for most people. But in March 2023, the IRS announced that the step-up in basis doesn’t apply to assets held in irrevocable grantor trusts. For those assets to receive the step-up, they must be included in the grantor’s gross estate and be subjected to the federal estate tax. As a result, the termination of an irrevocable grantor trust could trigger the estate tax if assets return to their taxable estate.

Cancelling an irrevocable trust can cause a tax nightmare that may take years to resolve. Discuss your situation with your estate planning attorney for viable alternatives that may be less risky. If you would like to learn more about irrevocable trusts, please visit our previous posts.

Reference: Yahoo Finance (Aug. 13, 2021) “Will Terminating an Irrevocable Trust Affect My Taxes?”

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Category: Assets

What You Should Know about Inherited IRAs

Immediate Annuity might be a useful Option for Retirees

Estate Planning can be a Powerful Part of a Financial Strategy

‘Pour-Over’ Will is vital to a Revocable Trust

Do You Need a Will or Trusts or Both?

Using an Annuity in your Planning to distribute Income

Which Trust, Revocable or Irrevocable?

Ways to use a No-Contest Clause in your Planning

How Parents can Help Children Buy a Home

Cancelling Irrevocable Trust can cause Tax nightmare

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