There are Benefits to a QTIP Trust

September 26, 2022

There are some significant benefits to a QTIP trust. A Qualified Terminable Interest Property Trust, or QTIP, is a trust allowing the person who makes the trust (the grantor) to provide for a surviving spouse while maintaining control of how the trust’s assets are distributed once the surviving spouse passes, as explained in the article “QTIP Trusts” from Investopedia.

QTIPs are irrevocable trusts, commonly used by people who have children from prior marriages. The QTIP allows the grantor to take care of their spouse and ensure assets in the trust are eventually passed to beneficiaries of their own choosing. Beneficiaries could be the grantor’s offspring from a prior marriage, grandchildren, other family members or friends.

In addition to providing the surviving spouse with income, the QTIP also limits applicable estate and gift taxes. The property within the QTIP trust provides income to the surviving spouse and qualifies as a marital deduction, meaning the value of the trust is not taxable after the death of the first spouse. Rather, the property in the QTIP trust will be included in the estate of the surviving spouse and subject to estate taxes depending on the value of their own assets and the estate tax exemption in effect at the time of death.

The QTIP can also assert control over how assets are handled when the surviving spouse dies, as the spouse never assumes the power of appointment over the principal. This is especially important when there is more than one marriage and children from more than one family. This prevents those assets from being transferred to the living spouse’s new spouse if they should re-marry.

A minimum of one trustee must be appointed to manage the trust, although there may be multiple trustees named. The trustee is responsible for controlling the trust and has full authority over assets under management. The surviving spouse, a financial institution, an estate planning attorney or other family member or friend may serve as a trustee.

The surviving spouse named in a QTIP trust usually receives income from the trust based on the trust’s income, similar to stock dividends. Payments may only be made from the principal if the grantor allows it when the trust was created, so it must be created to suit the couple’s needs.

Payments are made to the spouse as long as they live. Upon their death, the payments end, and they are not transferable to another person. The assets in the trust then become the property of the listed beneficiaries.

The marital trust is similar to the QTIP, but the is a difference in how the assets are controlled. A QTIP allows the grantor to dictate how assets within the trust are distributed and requires at least annual distributions. A marital trust allows the surviving spouse to dictate how assets are distributed, regular distributions are not required, and new beneficiaries can be added. The marital trust is more flexible and, accordingly, more common in first marriages and not in blended families.

There are benefits to a QTIP trust and a marital trust. Your estate planning attorney will explain further how else these two trusts are different and which one is best for your situation. There are other ways to create trusts to control how assets are distributed, how taxes are minimized and to set conditions on benefits. Each person’s situation is different, and there are trusts and strategies to meet almost every need imaginable. If you would like to learn more about different types of trusts, please visit our previous posts.

Reference: Investopedia (Aug. 14, 2022) “QTIP Trusts”

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Ways to Minimize Your Probate Estate

September 19, 2022

Having a properly prepared estate plan is especially important if you have minor children who would need a guardian, are part of a blended family, are unmarried in a committed relationship or have complicated family dynamics—especially those with drama. There are ways you can protect your loved ones, and minimize your probate estate, as described in the article “Try these steps to minimize your probate estate” from the Indianapolis Business Journal.

Probate is the process through which debts are paid and assets are divided after a person passes away. There will be probate of an estate whether or not a will and estate plan was done, but with no careful planning, there will be added emotional strain, costs and challenges left to your family.

Dying with no will, known as “intestacy,” means the state’s laws will determine who inherits your possessions subject to probate. Depending on where you live, your spouse could inherit everything, or half of everything, with the rest equally divided among your children. If you have no children and no spouse, your parents may inherit everything. If you have no children, spouse or living parents, the next of kin might be your heir. An estate planning attorney can make sure your will directs the distribution of your property.

Probate is the process giving someone you designate in your will—the executor—the authority to inventory your assets, pay debts and taxes and eventually transfer assets to heirs. In an estate, there are two types of assets—probate and non-probate. Only assets subject to the probate process need go through probate. All other assets pass directly to new owners, without involvement of the court or becoming part of the public record.

Many people embark on estate planning to avoid having their assets pass through probate. This may be because they don’t want anyone to know what they own, they don’t want creditors or estranged family members to know what they own, or they simply want to enhance their privacy. An estate plan is used to take assets out of the estate and place them under ownership to retain privacy.

Some of the ways to remove assets from the probate process are:

Living trusts. Assets are moved into the trust, which means the title of ownership must change. There are pros and cons to using a living trust, which your estate planning attorney can review with you.

Beneficiary designations. Retirement accounts, investment accounts and insurance policies are among the assets with a named beneficiary. These assets can go directly to beneficiaries upon your death. Make sure your named beneficiaries are current.

Payable on Death (POD) or Transferable on Death (TOD) accounts. It sounds like a simple solution to own many accounts and assets jointly. However, it has its own challenges. If you wished any of the assets in a POD or TOD account to go to anyone else but the co-owner, there’s no way to enforce your wishes.

An experienced, local estate planning attorney will be the best resource to minimize your probate estate. If there is no estate plan, an administrator may be appointed by the court and the entire distribution of your assets will be done under court supervision. This takes longer and will include higher court costs. If you are interested in learning more about the probate process, please visit our previous posts.

Reference: Indianapolis Business Journal (Aug. 26,2022) “Try these steps to minimize your probate estate”

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How Do Inherited IRAs Work?

September 14, 2022

With so much of America’s savings in IRAs, it’s important to know how these inherited accounts work. The recipient of an inherited IRA can spend their inheritance however they like. However, there are strict laws concerning how long money can remain in the inherited account, as explained in the article “Understanding Inherited IRAs” from The Motley Fool. Understanding options is crucial to avoid expensive penalties and minimize taxes. So how do inherited IRAs work?

An inherited IRA is a tax advantaged investment account a person opens to transfer the funds they’ve inherited as a beneficiary of a deceased’s retirement plan. The person opening the inherited IRA is known as the beneficiary. It’s usually a surviving spouse, child, other relative or friend. If there are multiple beneficiaries, they each must open separate inherited IRA accounts.

These accounts are used to transfer the inheritance to the new beneficiary. Beneficiaries may not make additional deposits into these accounts.

You could roll the funds into your own IRA if you are a surviving spouse. By rolling the funds into an inheritance IRA, you avoid paying taxes on the inherited funds and avoid taking required minimum distributions (RMDs) until your own retirement. The goal of an IRA is to avoid taking withdrawals to give funds extended time to grow. However, you can’t take any withdrawals until you reach age 59 ½ without incurring a penalty, unless the money is in a Roth account, and it’s been at least five years since you completed the rollover to your own IRA.

Withdrawing the funds as a lump sum is permitted. However, be prepared to pay a high tax bill, unless you’re withdrawing funds from a Roth IRA owned by the original owner for at least five years. If the owner didn’t have the account for at least five years, you’ve got a big tax bill to go with your big money.

Set up a five- or ten-year withdrawal plan. You can withdraw as much money as often as you’d like and in whatever increments you wish as long as the money is completely withdrawn by the end of the fifth or tenth year. If the account owner died in 2019 or earlier, you must follow the five-year rule.

Using the Life Expectancy Method determines your annual RMD by dividing the value of the inherited IRA by the distribution period for your age as listed in the IRS Single Life Expectancy Table. You can take more money out of the IRS if you like (and are prepared to pay taxes on the withdrawals). However, if you neglect to take out at least the RMD, you’ll receive a 50% penalty on the amount you should have taken.

If you inherit an IRA from someone who is not your spouse, you’ll need to know about many other rules. The most important one is this: you may not put the inherited IRA funds into your own IRA. Next, non-spouse beneficiaries wanting to use the life expectancy methods must meet one of the following criteria:

Inheriting funds from someone who died in 2019 or earlier
Are chronically ill or disabled
Are no more than ten years younger than the deceased account owner
Are a minor child of the deceased account owner, in which case they may use the life expectancy method but only until they reach 18 years of age.

The rules concerning Inherited IRAs are complex and mistakes can be costly. It is crucial that you understand how inherited IRAs work. Speak with an experienced estate planning attorney to help you gain access to the funds and protect yourself from penalties and avoidable taxes. If you would like to learn more about managing retirement accounts in estate planning, please visit our previous posts.

Reference: The Motley Fool (Aug. 18, 2022) “Understanding Inherited IRAs”

Estate Planning is critical for Blended Families

September 13, 2022

Today, a blended family is more common than ever, with stepfamily members, half-siblings, former spouses, new spouses and every combination of parents, children and partners imaginable. Traditional estate planning, including wills and non-probate tools like transfer on death (TOD) documents, as valuable as they are, may not be enough for the blended family, advises a recent article titled “Legal-Ease: Hers, his and ours—blended family estate planning” from limaohio.com. Estate planning is critical for blended families.

Not too long ago, when most people didn’t take advantage of the power of trusts, couples often went for estate plans with “mirror” wills, even those with children from prior marriages. Their wills basically said each spouse would leave the other spouse everything. This will would be accompanied by a contract stating neither would change their will for the rest of their lives. If there was a subsequent marriage after one spouse passed, this led to problems for the new couple, since the surviving spouse was legally bound not to change their will.

As an illustration, Bob has three children from his first marriage and Sue has two kids from her first marriage. They marry and have two children of their own. Their wills stipulate they’ll leave each other everything when the first one dies. There may have been some specific language about what would happen to the children from the first marriages, but just as likely this would not have been addressed.

It sounds practical enough, but in this situation, the children from the first spouse to die were at risk of being disinherited, unless plans were made for them to inherit from their biological parent.

Todays’ blended family benefits from the use of trusts, which are designed to protect each spouse, their children and any child or children they have together. There are a number of different kinds of trusts for use by spouses only to protect children and surviving spouses.

Trust law requires the trustee—the person who is in charge of administering the trust—to give a copy of the trust to each beneficiary. The trustee is also required to provide updates to beneficiaries about the assets in the trust.

A surviving spouse will most likely serve as the trustee when the first spouse passes and will have a legal responsibility to honor the shared wishes of the first spouse to pass.

If you and your new spouse have created a blended family, it is critical to evaluate your estate planning. Your estate planning attorney will be able to explain the many different types of spousal trusts, and which is best for your situation. If you would like to learn more about estate planning for blended families, please visit our previous posts.

Reference: limaohio.com (Aug. 20, 2022) “Legal-Ease: Hers, his and ours—blended family estate planning”

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Avoid naming Estate as an IRA Beneficiary

September 6, 2022

It is critical to avoid naming your estate as an IRA beneficiary. Usually when an estate planning attorney comes across an estate named as a beneficiary, all they can do is shake their heads. It’s already too late to make any changes and, in most cases, the results are bad, reports a recent article from Kiplinger that warns “Don’t Name Your Estate as Your IRA Beneficiary.”

This usually occurs because the person was in a hurry or didn’t know better. It is sometimes because they don’t know who should become the beneficiary and are advised to just write down their estate to move the application process along. The problem comes after years go by, the account owner dies and the beneficiary designation is revealed.

The SECURE Act eliminated what was once known as the “Stretch IRA,” where beneficiaries could take withdrawals based on an IRS table of life expectancy. The SECURE Act changed how IRA distributions are made and with a few exceptions, beneficiaries have ten years to empty the account.

The people who are not subject to the ten-year rule include: surviving spouses, disabled individuals, chronically ill individuals and individuals within ten years of age of the original owner.

One additional exception: minor children, until they reach the age of majority, at which point they too must empty the IRA in ten years’ time.

Estates may not use the ten-year rule. They must distribute the funds in an even shorter time period: five years. There are a number of reasons to avoid this:

The shorter the time period for withdrawals, the higher the potential for higher taxes.
Higher income levels can lead to higher Medicare charges.
Higher income levels can also lead to more taxes on Social Security income.
Assets left directly to a named beneficiary have some protection against creditors.
Assets in your estate have no protection at all against creditors.
Higher administration costs for probate fees, legal fees, etc.
Increased potential for a disgruntled heir to challenge your will.

The problem is solvable, if you act while you are living. Start by reviewing your accounts and identifying beneficiary designations. If you can’t find the beneficiary form, contact the institution, get a new one, complete it and submit it.

Avoid the serious mistake of naming your estate as an IRA beneficiary. Reviewing beneficiaries is something to be done every three to five years, every time you review your estate plan. Don’t leave this to the last minute—take care of it now. If you would like to learn more about naming beneficiaries to retirement accounts, please visit our previous posts.

Reference: Kiplinger (July 27, 2022) “Don’t Name Your Estate as Your IRA Beneficiary”

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IRS Extending Time to File Portability Exemption

August 9, 2022

When a spouse dies, the surviving spouse has the option of taking the unused federal estate tax exclusion and applying it to their own estate. This is known as electing portability for the DSUE, Deceased Spousal Unused Exemption, according to a recent article “Estates can now request late portability election relief for 5 years” from the Journal of Accountancy. The IRS is extending the time it takes to file a portability exemption.

The portability exemption has grown in use, and the scheduled decrease in the estate tax exemption starting on January 1, 2026, will no doubt dramatically expand the number of people who will be even more eager to adopt this process.

The IRS has extended the amount of time a surviving spouse may elect to take the Deceased Spousal Unused Exclusion (DSUE) from two to five years. The expanded timeframe is a reflection of the number of requests for letter rulings from estates missing the deadline for what had been a two-year relief period. The overly burdened and underfunded agency needed to find a solution to an avalanche of estates seeking this relief. Most of the requests were from estates missing the deadline between two years and under five years from the decedent’s date of death.

To reduce the number of letter ruling requests, the IRS has updated the requirement by extending the period within which the estate of a decedent may make the portability election under the simplified method to on or before the fifth anniversary of the decedent’s death.

There are some requirements to use the simplified method. The decedent must have been a citizen or U.S. resident at the date of death and the executor must not have been otherwise required to file an estate tax return based on the value of the gross estate and any adjusted taxable gifts. The executor must also not have timely filed the estate’s tax return within nine months after the date of death or date of extended file deadline.

If it is determined later that the estate was in fact required to file an estate tax return, the grant of relief will be voided.

Note that this change doesn’t extend the period during which the surviving spouse can claim a credit or a refund of any overpaid gift or estate taxes on the surviving spouse’s own gift or estate return.

The decision by the IRS extending the time to file a portability exemption will become even more popular after December 31, 2025, when the federal exemption changes from $12.6 million per person to $5 million (adjusted for inflation). Given the rise in housing prices, even people with modest estates may find themselves coming close or exceeding the federal estate tax level. If you would like to learn more about the portability exemption, please visit our previous posts.

Reference: Journal of Accountancy (July 11, 2022) “Estates can now request late portability election relief for 5 years”

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Burial Insurance can give you Peace of Mind

July 28, 2022

Burial insurance can give you peace of mind when you are already emotionally fragile after the death of a loved one. Burial insurance—also called end-of-life insurance, final expense, or funeral insurance—is a whole life insurance policy that’s designed to pay for the costs of your burial. These costs may include a memorial service, cremation costs, a headstone for your grave or other expenses associated with end-of-life arrangements.

Bankrate’s recent article entitled “Burial insurance” explains that if you have your affairs in order, your family already knows what will happen when you die. You may have given instructions for how you’d like your body to be treated, as well as ideas for your memorial service or what you want written on a tombstone.

However, all of these things cost money. If you don’t want your family to be stuck paying those costs, you may want to consider a burial policy.

Because the payout for burial insurance is small compared to many regular life insurance policies, the premiums can also be quite affordable. The policies are easy to purchase and don’t require a medical exam. However, there may be a waiting period and the policy may offer only limited benefits in the first two years.

Burial insurance policies cover all the normal costs incurred by someone’s death, such as:

Embalming
Memorial Service
A casket
Flowers
Cremation costs
A burial plot
The cost of transporting the body and/or remains
A headstone; and
Payment to clergy.

One type of burial policy, called a guaranteed issue life insurance policy, is available without any medical or health questions. It’s designed for those who are seriously ill and can’t get a policy any other way.

If all the appropriate arrangements have been made, the process of filing a burial insurance claim should be fairly smooth. Allow burial insurance to give you that peace of mind at an extremely difficult time. If you would like to read more about funeral expenses, and other issues related to probate, please visit our previous posts.

Reference: Bankrate (March 5, 2021) “Burial insurance”

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Be Cautious when Buying Funeral Services

June 28, 2022

Planning a funeral is stressful. It is important to be cautious when buying funeral services. People usually don’t buy funeral services frequently, so they’re unfamiliar with the process. Add to this the fact that they’re typically bereaved and stressed, which can affect decision-making, explains Joshua Slocum, executive director of the Funeral Consumers Alliance, an advocacy group. In addition, people tend to associate their love for the dead person with the amount of money they spend on the funeral, says The Seattle Times’ recent article entitled “When shopping for funeral services, be wary.”

“Grieving people really are the perfect customer to upsell,” Slocum said.

The digital age has also made it easier to contact grieving customers. Federal authorities recently charged the operator of two online cremation brokerages of fraud. The operator misled clients and even withheld remains to force bereaved families to pay inflated prices.

The Justice Department, on behalf of the Federal Trade Commission, sued Funeral & Cremation Group of North America and Legacy Cremation Services, which operates under several names and the companies’ principal, Anthony Joseph Damiano. The companies, according to a civil complaint, sell their funeral services through the websites Legacy Cremation Services and Heritage Cremation Provider.

These companies pretend to be local funeral homes offering low-cost cremation services. Their websites use search engines that make it look like consumers are dealing with a nearby business. However, they really act as middlemen, offering services and setting prices with customers, then arranging with unaffiliated funeral homes to perform cremations.

The lawsuit complaint says these companies offered lower prices for cremation services than they ultimately required customers to pay and arranged services at locations that were farther than advertised, forcing customers to travel long distances for viewings and to obtain remains.

“In some instances when consumers contest defendants’ charges,” the complaint said, the companies “threaten not to return or actually refuse to return” remains until customers pay up.

Mr. Slocum of the Funeral Consumers Alliance recommends contacting several providers — in advance, if possible, so you can look at the options without pressure. And ask for the location of the cremation center and request a visit. Also note that cremation sites in the U.S. are frequently not located in the same place as the funeral home and may not be designed for consumer tours.

Note that the FTC’s Funeral Rule predates the internet and doesn’t require online price disclosure. Likewise, most states don’t require this either.

It is wise to be cautious when buying funeral services. Last year during the pandemic, the government issued a warning about fraud related to the funeral benefits. They said FEMA had reports of people receiving calls from strangers offering to help them “register” for benefits. If you would like to learn more about planning for a funeral, and other related topics, please visit our previous posts.

Reference: Seattle Times (May 15, 2022) “When shopping for funeral services, be wary”

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Best Uses of Life Insurance Benefits

May 5, 2022

The loss of a spouse is an extremely stressful event. It comes with many emotions that can be overwhelming for the bereaved. Hopefully, life insurance is one thing that was put in place to allow those remaining to process their loss without fretting over their finances. But what are the best uses of life insurance benefits, says Kiplinger’s recent article entitled “What Is the Best Way for a Widow to Use Life Insurance Proceeds?”

Life insurance death benefits can be paid within 30 days after you submit a claim. To do this, you need a certified death certificate, which is generally issued in less than a week by the funeral home. You should also order plenty of copies (about 15) for closing accounts.

The best use of the money is different for each widow and her unique situation.

Funeral Costs. Use life insurance money to cover these costs to decrease your financial strain.

Ongoing Expenses. When your spouse dies, living expenses do not stop. Your income is frequently reduced. In fact, after the death of a spouse, household income generally declines by about 40% due to changes in Social Security benefits, spouse’s retirement income and earnings. The death benefit from a life insurance policy can help provide the funds you need to help cover your mortgage, car payment, utilities, food, clothing and health care premiums.

Debts. You are generally not personally responsible for paying off the debts of your husband, provided they are in his name alone. When an estate does not have enough funds to pay all the debts, any gifts that were supposed to be paid out to beneficiaries will most likely be reduced. Note that you may be responsible for certain types of debt, such as debt that is jointly owned or a loan that you have co-signed. Talk to an experienced elder law attorney to understand the laws of your state, so that you know where you stand concerning all debts.

Create an Emergency Fund. Life insurance can help build a liquid emergency fund, which should cover three to six months of expenses.

Supplement Your Retirement. When a woman loses her spouse, she becomes much more vulnerable to poverty. To retire, a person typically needs 80% of their preretirement income to live comfortably.

Education. If you are a young widow, the life insurance proceeds can be used to pay for going back to school to augment your earning abilities. These funds could also cover the cost of college for your children. However, you should only save for college educational costs after your retirement savings is secure.

It is up to beneficiary to decide the best uses of life insurance benefits going forward. It is a good idea to consult an estate planning and probate attorney to make sure you have a full grasp of the benefits provided. If you would like to learn more about life insurance and estate planning, please visit our previous posts.

Reference: Kiplinger (Dec. 17, 2021) “What Is the Best Way for a Widow to Use Life Insurance Proceeds?”

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There are the New IRA Distribution Rules

April 20, 2022

The IRS recently announced there are new IRA distribution rules in the works. Many of the proposed distribution rules, which will be subject to further action in late spring, depend upon whether or not the original IRA owner died before or after the applicable required beginning date for distributions. As explained in the article “The Internal Revenue Service (IRS) Issues Proposed Minimum Distribution Rules” from The National Law Review, the age changed as a result of the SECURE Act, to 72.

Spousal Beneficiaries. If the spouse of the deceased IRA owner is the sole designated beneficiary and elects not to rollover the distribution, the surviving spouse may take RMDs over the deceased’s life expectancy. However, if the owner died before their required beginning date and the spouse is the sole beneficiary, the spouse may opt to delay distributions until the end of the calendar year in which the owner would have turned 72.

If the decedent died after turning 72, the annual distributions are required for all subsequent years and the spouse may take distributions over the longer remaining life expectancy.

Minor Children Beneficiaries. If the beneficiary of the IRA is a minor child, under age 21, annual distributions are required using the minor child’s life expectancy. When the minor turns 21, they must take annual distributions and the account must be fully distributed ten years after the child’s 21^st birthday.

Adult Children Beneficiaries. If the account owner dies after their required beginning date (age 72), an adult child who is a beneficiary must take annual distributions based on the beneficiary’s life expectancy. The account must be completely emptied within ten years of the original IRA owner’s death.

This applies only to adult children who are beneficiaries and are not disabled or chronically ill. Disabled or chronically ill adult children fall into a different category under the SECURE Act, with different distribution rules.

Special Rules for Roth IRAs. The benefits of Roth IRA accounts remain. There are no minimum distributions from a Roth IRA while the account owner is still living. After the death of the Roth IRA owner, the required minimum distribution rules apply to the Roth IRA, as if the Roth IRA owner died before their required beginning date.

If the sole beneficiary is the Roth IRA owner’s surviving spouse, the surviving spouse may delay distribution until the decedent would have attained their beginning distribution date.

Now that there are new IRA distribution rules to consider, speak with your estate planning attorney to determine if you need to update your estate plan. There are strategies to protect heirs from the significant tax liabilities these changes may create. If you would like to read more about IRAs and other retirement accounts, please visit our previous posts.

Reference: The National Law Review (March 25, 2022) “The Internal Revenue Service (IRS) Issues Proposed Minimum Distribution Rules”

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Category: Surviving Spouse

There are Benefits to a QTIP Trust

Ways to Minimize Your Probate Estate

How Do Inherited IRAs Work?

Estate Planning is critical for Blended Families

IRS Extending Time to File Portability Exemption

Burial Insurance can give you Peace of Mind

Be Cautious when Buying Funeral Services

There are the New IRA Distribution Rules

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