Assets not Covered by a Will

May 12, 2021

A last will and testament is one part of a holistic estate plan used to direct the distribution of property after a person has died. A recent article titled “What you can’t do with a will” from Ponte Vedra Recorder explains how wills work, and the types of assets not covered by a will.

Wills are used to inform the probate court regarding your choice of guardians for any minor children and the executor of your estate. Without a will, both of those decisions will be made by the court. It’s better to make those decisions yourself and to make them legally binding with a will.

Lacking a will, an estate will be distributed according to the laws of the state, which creates extra expenses and sometimes, leads to life-long fights between family members.

Property distributed through a will necessarily must be processed through a probate, a formal process involving a court. However, some assets are not covered by a will and do not pass through probate. Here’s how non-probate assets are distributed:

Jointly Held Property. When one of the “joint tenants” dies, their interest in the property ends and the other joint tenant owns the entire property.

Property in Trust. Assets owned by a trust pass to the beneficiaries under the terms of the trust, with the guidance of the trustee.

Life Insurance. Proceeds from life insurance policies are distributed directly to the named beneficiaries. Whatever a will says about life insurance proceeds does not matter—the beneficiary designation is what controls this distribution, unless there is no beneficiary designated.

Retirement Accounts. IRAs, 401(k) and similar assets pass to named beneficiaries. In most cases, under federal law, the surviving spouse is the automatic beneficiary of a 401(k), although there are always exceptions. The owner of an IRA may name a preferred beneficiary.

Transfer on Death (TOD) Accounts. Some investment accounts have the ability to name a designated beneficiary who receives the assets upon the death of the original owner. They transfer outside of probate.

Here are some things that should NOT be included in your will:

Funeral instructions might not be read until days or even weeks after death. Create a separate letter of instructions and make sure family members know where it is.

Provisions for a special needs family member need to be made separately from a will. A special needs trust is used to ensure that the family member can inherit assets but does not become ineligible for government benefits. Talk to an elder law estate planning attorney about how this is best handled.

Conditions on gifts should not be addressed in a will. Certain conditions are not permitted by law. If you want to control how and when assets are distributed, you want to create a trust. The trust can set conditions, like reaching a certain age or being fully employed, etc., for a trustee to release funds.

Work with an experienced estate planning attorney to fully understand what assets are covered – and not covered – by a will; and whether further planning, such as a trust, is right for you.

If you would like to learn more about wills and how to distribute assets, please visit our previous posts.

Reference: Ponte Vedra Recorder (April 15, 2021) “What you can’t do with a will”

Managing an Inherited Retirement Account

May 5, 2021

The rules for managing an inherited retirement account are complicated—just as complicated as the rules for having 401(k)s and IRA to begin with. Mistakes can be hard to undo, warns the article “Here’s how to handle the complicated rules for an inherited 401(k) or IRA” from CNBC.

The 2019 Secure Act changed how inherited tax deferred assets are treated after the original owner’s death. The options depend upon the relationship between the owner and the heir. The ability to stretch out distributions across the heir’s lifetime if the owner died on or after January 1, 2020 ended for most heirs. Exceptions are the spouse, certain disabled beneficiaries, or minor children of the decedent. Otherwise, those accounts must be depleted within ten years.

Non-spouses with flexibility include minor children. That’s all well and fine, but once the minor child turns 18 (in most states), the 10-year rule kicks in and the individual has 10 years to empty the retirement account. Before that time, the minor child must take annual required minimum distributions (RMDs) based on their own life expectancy.

These required withdrawals typically begin when a retiree reaches age 72, and the amount is based on the account owner’s anticipated lifespan.

Beneficiaries who are chronically ill or disabled, or who are not more than ten years younger than the decedent, may take distributions based on their own life expectancy. They are not subject to the ten- year rule.

Beneficiaries subject to that ten-year depletion rule should create a strategy, including creating an Inherited IRA and transferring the funds to it. If the inherited account is a Roth or a traditional IRA, the process is slightly different. Distributions from a Roth IRA are generally tax-free, and traditional IRA distributions are taxed when withdrawals occur. One point about Roths—if you inherit a Roth that’s less than five years old, any earnings withdrawn will be subject to taxes, but the contributed after-tax amounts remain tax-free.

If an heir ends up with a retirement account via an estate, versus being the named beneficiary on the account, the account must be depleted within five years, if the original owner had not started taking RMDs. If RMDs were underway, the heir would need to keep those withdrawals going as if the original owner continued to live.

For spouses, there are more options. First, roll the money into your own IRA and follow the standard RMD rules. At age 72, start taking required withdrawals based on your own life expectancy. If you don’t need the income, you can leave the money in the account, where it can continue to grow. However, if you are not yet age 59½, you may be subject to a 10% early withdrawal penalty if you take money from the account. In that case, put the money into an Inherited IRA account, with yourself as the beneficiary.

IRAs and 401(k)s are complicated and managing an inherited retirement account can be just as complicated. Speak with your estate planning attorney to make an informed decision when creating an estate plan, so your inherited assets will work with, not against, your overall strategy.

If you would like to learn more about managing inherited retirement accounts and how to incorporate them into your broader estate planning, please visit our previous posts.

Reference: CNBC (April 11, 2021) “Here’s how to handle the complicated rules for an inherited 401(k) or IRA”

Qualified Charitable Distributions are a Tool

April 13, 2021

Qualified charitable distributions are a tool that allows individual retirement holders to divert some of their federally taxable required distributions to charity, reports a recent article “A tax break for retirees is back. Here’s how to use it–and what to avoid,” from The Washington Post. Known as QCDs, they were not a big deal until 2017, when a change in the tax law changed the number of people itemizing deductions, including charitable contributions, from 31 percent to 11 percent, according to the IRS.

Tax laws let you put tax-deductible money into “defined contribution” accounts, including IRAs, 401(k)s and 403(b)s, until you reach age 72, when you are required to start taking withdrawals—federally taxable Required Minimum Distributions–from the accounts.

The size of the distribution depends upon the year-end retirement account balances and your age. If you had $100,000 in a retirement account last December 31 and turned 75 this year, the RMD is about $4,370. For an 80-year-old, the number would be around $5,350, and at 85, it would be $6,760.

In 2020, QCDs were of little interest because the CARES Act cancelled any RMD requirements. You could still use a QCD, but there was no tax advantage of reducing taxable income by offsetting required distributions.

In 2021, RMDs are back, and QCDs are worth doing again. To make a QCD, you ask the IRA administrator to send a check made out to a registered charity. You are permitted to donate as much as $100,000 per year. Let’s reinforce the message: the check must be made out to the charity, not to you. You also may not send the money to your own donor-advised fund.

IRAs can be used for QCDs, but not 401(k)s or 403(b)s.

You will need to keep track of the QCDs yourself. Do not expect the IRA custodian to do that for you. The retirement plan does send a tax form, the 1099-Rs, to the IRS that shows your total distributions for the year. The QCDs are subtracted from your 1099-R income by you or your tax preparer.

It sounds great, but there is a problem, created by the SECURE Act of 2019. That law let people aged 70½ and older make tax-deductible contributions to their IRAs. However, if you make a tax-deductible contribution to your IRA that you use for a QCD, it triggers a reduction in the amount of the QCD that you can deduct from your federally taxable income.

Do not make QCDs from the same IRA to which you are making tax-deductible contributions. You can set up a solo 401(k) if you are self-employed or use a SEP-IRA to make deductible contributions. Here again, trouble lurks; do not make a QCD from a SEP-IRA in the same year you are claiming an income tax deduction for contributing to the SEP-IRA.

Qualified charitable distributions are a tool to help manage your tax burden. Work carefully with your financial planner and estate planning attorney to design a plan that best utilizes QCDs.

If you would like to learn more about charitable contributions, please visit our previous posts.

Reference: The Washington Post (March 18, 2021) “A tax break for retirees is back. Here’s how to use it–and what to avoid”

Avoid Naming a Trust as Beneficiary of Your IRA

March 10, 2021

It is generally a good idea to avoid naming a trust as beneficiary of your IRA. The IRA usually loses the benefit of tax deferral, due to the fact that it has to be distributed faster than in other scenarios. There are only a few cases when a trust as beneficiary can avoid this problem.

Wealth Advisor’s recent article entitled “Should A Living Trust Be Beneficiary Of Your IRA?” explains that the general rule is when an IRA beneficiary isn’t an individual, the IRA must be distributed fully within five years. When a trust, an estate, or a business entity is named as beneficiary, the IRA must be distributed quickly, and it’s then taxed. However, there’s an exception when you name a trust that qualifies as a “look-through” or “see-through” trust under IRS rules. To draft this type of trust, work with and experienced estate planning attorney to be certain that it avoids the five-year rule. Even so, the IRA must be distributed to the trust within 10 years, in most instances.

Another exception says there may not be a penalty when your spouse’s revocable living trust is named as the IRA beneficiary. Consider a recent IRS ruling that involved a married couple. The husband owned an IRA and had started to take required minimum distributions (RMDs). He died and had named a trust as sole beneficiary of his IRA. The wife had previously established the trust and was the sole beneficiary and sole trustee of the trust. She could amend or revoke the trust and could distribute all income and principal of the trust for her own benefit. In effect, it was a standard revocable living trust that is primarily used to avoid probate. The widow wanted to exercise the spousal option for an inherited IRA to roll the IRA over to an IRA in her name. The move would give her a new start, letting her manage the IRA, without reference to her late husband’s IRA. She could begin her RMDs based on her own required beginning date and life expectancy. She also could designate her own beneficiaries of the IRA.

The widow asked the IRS to rule that the IRA could be rolled over tax free into an IRA in her name. She wanted to have the IRA balance distributed directly to her to roll it over to an IRA in her own name within 60 days. The IRS said that was okay, noting that she was the trustee and sole beneficiary of the trust. She was entitled to all income and principal of the trust. Moreover, she was the surviving spouse of the deceased IRA owner.

In this situation, the widow was the sole person for whose benefit the IRA is maintained. As such, she can take a distribution from the inherited IRA and roll it over to an IRA in her own name without having to include any of the distribution in gross income, provided the rollover was accomplished within 60 days of the distribution.

Although this was a good answer for the widow, you may not want to name a living trust or your estate as the beneficiary of your IRA, even under similar circumstances. She had to apply to the IRS for a private ruling to be sure of the tax results, which is an expensive and time-consuming process.

Avoid naming a trust as beneficiary of your IRA, unless it is under very limited situations. This can be very complicated, so talk to an experienced estate planning attorney about your specific situation.

If you would like to learn more about IRA distributions, please visit our previous posts.

Reference: Wealth Advisor (Dec. 29, 2020) “Should A Living Trust Be Beneficiary Of Your IRA?”

A Health Savings Account Can Be A Great Help

February 25, 2021

A health savings account can be a great help when it’s needed to tap the funds and it’s a tool to save money for retirement.

Money Talks News’ recent article “3 Ways a Health Savings Account Can Improve Your Finances” explains that a health savings account, or HSA, can help you stretch your health care dollars and build your retirement savings at the same time, provided you’re eligible for one and you spend the money in your HSA on eligible expenses.

Let’s look at the benefits of HSAs and tips for opening one:

HSAs are tax-free. Depositing funds in a health savings account is one of the very few ways you can do to entirely avoid paying any taxes on that money at any point. Compare that to money in tax-advantaged accounts, like 401(k)s and individual retirement accounts (IRAs), that may grow tax-free. However, you will pay taxes on at least the principal at some point.

However,with an HSA, you get a tax deduction for the money you put into the account. The earnings grow tax-free, and provided that you use it for qualified health care expenses, you don’t pay taxes on the money you withdraw from the account. It’s truly tax-free.

HSAs are more flexible than FSAs. A health flexible spending account (FSA) is another type of tax-advantaged account for stretching health care dollars.

However, FSAs have a big drawback: FSAs are subject to a “use-or-lose” provision. This means workers are usually required to spend any money in their FSAs within their health insurance plan year or else lose the money.

However, with an HSA, your money stays in the account and thus can grow year after year.

You can invest the money in your HSA. You are allowed to invest the money that’s in your HSA, so it can grow faster with investment options. The investment options will vary depending on where you open your HSA.

A health savings account can be a great help when your family is looking for ways to stretch their income farther into retirement. It is fairly easy to start an HSA, but you must be eligible for one. The IRS says that the primary requirement to qualify is that you are covered by a high-deductible health insurance plan. To open an HSA, you pick a custodian—an institution that offers HSAs.

If you are interested in learning more about HSAs and how they can benefit your family, please visit our previous posts.

Reference: Money Talks News (May 26, 2020) “3 Ways a Health Savings Account Can Improve Your Finances”

Don’t Fail to Fund Your Trust

January 29, 2021

Revocable trusts can be an effective way to avoid probate and provide for asset management, in case you become incapacitated. These revocable trusts — also known as “living” trusts — are very flexible and can achieve many other goals. A revocable trust is a great tool, but don’t fail to fund your trust.

Point Verda Recorder’s recent article entitled “Don’t forget to fund your revocable trust” explains that you cannot take advantage of what the trust has to offer, if you do not place assets in it. Failing to fund the trust means that your assets may be required to go through a costly probate proceeding or be distributed to unintended recipients. This mistake can ruin your entire estate plan.

Transferring assets to the trust—which can be anything like real estate, bank accounts, or investment accounts—requires you to retitle the assets in the name of the trust.

If you place bank and investment accounts into your trust, you need to retitle them with words similar to the following: “[your name and co-trustee’s name] as Trustees of [trust name] Revocable Trust created by agreement dated [date].” An experienced estate planning attorney should be consulted.

Depending on the institution, you might be able to change the name on an existing account. If not, you’ll need to create a new account in the name of the trust, and then transfer the funds. The financial institution will probably require a copy of the trust, or at least of the first page and the signature page, as well as the signatures of all the trustees.

Provided you’re serving as your own trustee or co-trustee, you can use your Social Security number for the trust. If you’re not a trustee, the trust will have to obtain a separate tax identification number and file a separate 1041 tax return each year. You will still be taxed on all of the income, and the trust will pay no separate tax.

If you’re placing real estate in a trust, ask an experienced estate planning attorney to make certain this is done correctly.

You should also consult with an attorney before placing life insurance or annuities into a revocable trust and talk with an experienced estate planning attorney, before naming the trust as the beneficiary of your IRAs or 401(k). This may impact your taxes. Remember, if you fail to fund your trust, your heirs may be in for a huge headache.

If you would like to learn more about funding a trust, please visit our previous posts.

Reference: Point Verda Recorder (Nov. 19, 2020) “Don’t forget to fund your revocable trust”

Pay for Your Debts at Death

December 30, 2020

When you pass away, your assets become your estate, and the process of dividing up debt after your death is part of probate. Creditors only have a certain amount of time to make a claim against the estate (usually three months to nine months). So how do you pay for your debts at death?

Kiplinger’s recent article entitled “Debt After Death: What You Should Know” explains that beyond those basics, here are some situations where debts are forgiven after death, and some others where they still are required to be paid in some fashion:

The beneficiaries’ money is partially protected if properly named. If you designated a beneficiary on an account — such as your life insurance policy and 401(k) — unsecured creditors typically can’t collect any money from those sources of funds. However, if beneficiaries weren’t determined before death, the funds would then go to the estate, which creditors tap.
Credit card debt depends on what you signed. Most of the time, credit card debt doesn’t disappear when you die. The deceased’s estate will typically pay the credit card debt at death from the estate’s assets. Children won’t inherit the credit card debt, unless they’re a joint holder on the account. Likewise, a surviving spouse is responsible for their deceased spouse’s debt, if he or she is a joint borrower. Moreover, if you live in a community property state, you could be responsible for the credit card debt of a deceased spouse. This is not to be confused with being an authorized user on a credit card, which has different rules. Talk to an experienced estate planning attorney, if a creditor asks you to pay the credit card debt at death. Don’t just assume you’re liable, just because someone says you are.
Federal student loan forgiveness. This applies both to federal loans taken out by parents on behalf of their children and loans taken out by the students themselves. If the borrower dies, federal student loans are forgiven. If the student passes away, the loan is discharged. However, for private student loans, there’s no law requiring lenders to cancel a loan, so ask the loan servicer.
Passing a mortgage to heirs. If you leave a mortgage behind for your children, under federal law, lenders must let family members assume a mortgage when they inherit residential property. This law prevents heirs from having to qualify for the mortgage. The heirs aren’t required to keep the mortgage, so they can refinance or pay for your debt entirely. For married couples who are joint borrowers on a mortgage, the surviving spouse can take over the loan, refinance, or pay it off.
Marriage issues. If your spouse passes, you’re legally required to pay any joint tax owed to the state and federal government. In community property states, the surviving spouse must pay off any debt your partner acquired while you were married. However, in other states, you may only be responsible for a select amount of debt, like medical bills.

You may want to purchase more life insurance to pay for your debts at death or pay off the debts while you’re alive. If you would like to learn more about debts and other vital issues to address when someone dies, please visit our previous posts.

Reference: Kiplinger (Nov. 2, 2020) “Debt After Death: What You Should Know”

How Do You Handle A Large Inheritance?

December 9, 2020

How do you handle a large inheritance? Wealth Advisor’s recent article entitled “Death by inheritance: Windfall can cause complications” cautions that in a community property state, if you’re married, your inheritance is separate property. It will stay separate property, provided it’s not commingled with community funds or given to your spouse. That article says that it is much harder to do than it looks.

One option is for you and your spouse to sign a written marital agreement that states that your inheritance (as well as any income from it) remains your separate property. However, you have to then be careful that you keep it apart from your community property.

If your spouse doesn’t want to sign such an agreement, then speak to an attorney about what assets in your inheritance can safely be put into a trust. If you do this, take precautions to monitor the income and keep it separate.

Another route is to put your inheritance into assets held in only your name and segregate the income from them. This is important because income from separate property is considered community property.

Another tip for handling a large inheritance, is to analyze it by type of asset. IRAs and other qualified funds take very special handling to avoid unnecessary taxes or penalties. If you immediately cash out your inherited traditional IRA, you’ll forfeit a good chunk of it in taxes. If you don’t take the mandatory distribution of a Roth IRA, you’re going see a major penalty.

Inherited real estate has its own set of issues. If you inherited only part of a piece of real property, then you’ll have to work with the other owners as to its use, maintenance, and/or sale. For example, your parents’ summer home is passed to you and your three siblings. If things get nasty, you may have to file a partition suit to force a sale, if your siblings aren’t cooperative. Real estate can also be encumbered by an environmental issue, a mortgage, delinquent taxes, or some other type of lien.

Some types of assets are just a plain headache: timeshares, partnership, or entity interests that don’t have a buy-sell agreement, along with Title II weapons (which may be banned in your state).

You can also refuse an inheritance by use of a disclaimer. It’s a procedure where you decline to take part or all of an inheritance.

Finally, speak with an experienced estate planning attorney that is familiar with how to handle a large inheritance, so you can incorporate that inheritance into your own estate plan.

If you would like to learn more about inheritance, please visit our previous posts.

Reference: Wealth Advisor (Nov. 10, 2020) “Death by inheritance: Windfall can cause complications”

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Benefit from a Roth IRA and Social Security

November 5, 2020

When originally created, Social Security was designed to prevent the elderly and infirm from sinking into dire poverty. When most working Americans enjoyed a pension from their employer, Social Security was an additional source of income and made for a comfortable retirement. However, with an average monthly benefit just over $1,500 and few pensions, today’s Social Security is not enough money for most Americans to maintain a middle-class standard of living, says the article “3 Reasons a Roth IRA Is a Perfect Supplement to Social Security” from Tuscon.com. It’s important to plan for additional income streams and one to consider is the Roth IRA. So how do you benefit from a Roth IRA and Social Security?

Roth IRAs can be funded at any age. Many seniors today are continuing to work to generate income or to continue a fulfilling life. Their earnings can be put into a Roth IRA, regardless of age. If you are still working but don’t need the paycheck, that’s a perfect way to fund the Roth IRA.

Withdrawals from a Roth won’t trigger taxes on Social Security benefits. If your only income is Social Security, you probably won’t have to worry about federal taxes. However, if you are working while you are collecting benefits, once your earnings reach a certain level, those benefits will be taxed.

To calculate taxes on Social Security benefits, you’ll need to determine your provisional income, which is the non-Social Security income plus half of your early benefit. If you earn between $25,000 and $44,000 as a single tax filer or between $32,000 and $44,000 as a married couple, you could be taxed as much as 50% of your Social Security benefits. If your single income goes past $34,000 and married income goes past $44,000, you could be taxed on up to 85% of your benefits.

If you put money into a Roth IRA, withdrawals don’t count towards your provisional income. That could leave you with more money from Social Security.

A Roth IRA is flexible. The Roth IRA is the only tax-advantaged retirement savings plan that does not impose Required Minimum Distributions or RMDs. That’s because you’ve already paid taxes when funds went into the account. However, the flexibility is worth it. You can leave the money in the account for as long as you want, so savings continue to grow tax-free. You can also leave money to your heirs.

While you don’t have to put your savings into a Roth IRA, doing so throughout your career—or starting at any age—will allow you to benefit from a Roth IRA and Social Security throughout retirement.

If you would like to learn more about Social Security and retirement accounts, please visit our previous posts.

Reference: Tuscon.com (Oct. 5, 2020) “3 Reasons a Roth IRA Is a Perfect Supplement to Social Security”

Your Estate Plan May Need an Audit

October 22, 2020

You should have an estate plan because every state has statutes that describe how your assets are managed, and who benefits if you don’t have a will. Most people want to have more say about who and how their assets are managed, so they draft estate planning documents that match their objectives. If you created an estate plan years – or even decades ago – your estate plan may need an audit.

Forbes’ recent article entitled “Auditing Your Estate Plan” says the first question is what are your estate planning objectives? Almost everyone wants to have financial security and the satisfaction of knowing how their assets will be properly managed. Therefore, these are often the most common objectives. However, some people also want to also promote the financial and personal growth of their families, provide for social and cultural objectives by giving to charity and other goals. To help you with deciding on your objectives and priorities, here are some of the most common objectives:

Making sure a surviving spouse or family is financially OK
Providing for others
Providing now for your children and later
Saving now on income taxes
Saving on estate and gift taxes in the future
Donating to charity
Having a trusted agency manage my assets, if I am incapacitated
Having money for my children’s education
Having retirement income; and
Shielding my assets from creditors.

Speak with an experienced estate planning attorney about the way in which you should handle your assets. If your plan doesn’t meet your objectives, your estate plan should be revised. This estate planning audit will include a review of your will, trusts, powers of attorney, healthcare proxies, beneficiary designation forms and real property titles.

Note that joint accounts, pay on death (POD) accounts, retirement accounts, life insurance policies, annuities and other assets will transfer to your heirs by the way you designate your beneficiaries on those accounts. Any assets in a trust won’t go through probate. “Irrevocable” trusts may protect assets from the claims of creditors and possibly long-term care costs, if properly drafted and funded.

Another question is what happens in the event you become mentally or physically incapacitated and who will see to your financial and medical affairs. Use a power of attorney to name a person to act as your agent in these situations.

If you have decided that your estate plan needs an audit and you find that your plans need to be revised, follow these steps:

Work with an experienced estate planning attorney to create a plan based on your objectives
Draft and execute a will and other estate planning documents customized to your plan
Correctly title your assets and complete your beneficiary designations
Create and fund trusts
Draft and sign powers of attorney, in the event of your incapacity
Draft and sign documents for ownership interest in businesses, intellectual property, artwork and real estate
Discuss the consequences of implementing your plan with an experienced estate planning attorney; and
Review your plan regularly.

To learn more about estate planning documents such as a trust or will, please visit our previous posts.

Reference: Forbes (Sep. 23, 2020) “Auditing Your Estate Plan”

Category: 401(k)

Assets not Covered by a Will

Managing an Inherited Retirement Account

Qualified Charitable Distributions are a Tool

Avoid Naming a Trust as Beneficiary of Your IRA

A Health Savings Account Can Be A Great Help

Don’t Fail to Fund Your Trust

Pay for Your Debts at Death

How Do You Handle A Large Inheritance?

Your Estate Plan May Need an Audit

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