A Well-Planned Strategy ensures Families maximize Financial Aid when planning for College

March 13, 2025

Higher education costs continue to rise, making early financial planning essential for families. Whether parents set aside money in a 529 plan, navigating financial aid applications, or managing estate planning alongside college savings, avoiding common mistakes can save thousands of dollars. A well-planned strategy ensures that families maximize financial aid when planning for college.

Many families unknowingly reduce their financial aid eligibility by incorrectly filling out the FAFSA (Free Application for Federal Student Aid) or structuring college savings accounts in ways that negatively impact aid calculations.

Understanding College Savings Options

Several financial tools help families prepare for the high cost of tuition. However, each option affects financial aid differently. Knowing how assets are counted in the FAFSA calculation can help parents avoid decisions that reduce aid eligibility.

529 College Savings Plans

A 529 plan is one of the most popular ways to save for college. These tax-advantaged accounts allow parents, grandparents, or guardians to invest money for education expenses, while benefiting from tax-free withdrawals when funds are used for tuition, books and housing.

While 529 plans offer tax benefits, they also impact financial aid calculations. Assets held in a parent-owned 529 account count as a parental asset on the FAFSA, reducing eligibility for need-based aid. However, the impact is relatively small—about 5.64% of the account’s value is considered in aid calculations, compared to 20% for student-owned assets.

Custodial Accounts (UGMA/UTMA)

Some families use Uniform Gifts to Minors Act (UGMA) or Uniform Transfers to Minors Act (UTMA) accounts to save for their child’s future. These accounts are considered the student’s assets and carry a much higher financial aid penalty than a 529 plan.

Because the FAFSA formula expects students to contribute 20% of their assets toward tuition, families with large UGMA/UTMA accounts may receive less financial aid than those using a 529 plan.

Trusts and Estate Planning Considerations

Families with substantial assets often use trusts to protect wealth and structure inheritance. While some trusts help secure long-term financial stability, others can unexpectedly reduce financial aid eligibility.

Revocable trusts, where parents maintain control over assets, are counted in the FAFSA calculation as parental assets. Irrevocable trusts, however, may not be considered available for college expenses, depending on how they are structured. Consulting an estate planning attorney can help families balance asset protection with college savings goals.

Common FAFSA Mistakes that Reduce Financial Aid

The FAFSA is the key to unlocking federal financial aid, grants and scholarships. However, errors in the application can reduce assistance or cause costly delays.

Overreporting Retirement Assets

Retirement savings in 401(k)s, IRAs and pension accounts do not need to be reported on the FAFSA. However, many families mistakenly include these figures, inflating reported assets and lowering aid eligibility.

Incorrectly Reporting Parent and Student Income

FAFSA uses tax information from a prior year, meaning financial aid applications for the 2025-26 school year will use 2023 tax data. Families should ensure income and tax figures match IRS records to prevent application errors that could delay aid processing.

Not Using the IRS Data Retrieval Tool (DRT)

The IRS Data Retrieval Tool automatically transfers tax information to the FAFSA, reducing errors and simplifying the application process. Families who manually enter tax data risk inconsistencies that could flag their application for verification, delaying aid decisions.

Failing to Update Household Size or Number of Students in College

Families often overlook changes in household size or the number of children in college, both of which significantly have an impact on aid eligibility. If an older sibling graduates, the remaining student’s aid amount may be lower than in previous years. Keeping this information accurate prevents unexpected reductions in financial aid.

How Estate Planning has an Impact on College Funding

Estate planning ensures financial security for future generations but can also impact how much financial aid a student receives. Families with substantial assets in trusts, large inheritances, or investments should work with an estate planning attorney to:

Minimize FAFSA-reportable assets by structuring trusts appropriately
Use strategic gifting to reduce parental assets while funding education
Ensure inheritance planning does not unintentionally disqualify students from financial aid

Careful coordination between college savings strategies and estate planning ensures that families optimize education funding and long-term wealth protection.

Plan for College and Protect Your Assets

Balancing college savings, estate planning and financial aid eligibility requires careful planning. Whether you are structuring a 529 plan, managing trust assets, or optimizing FAFSA eligibility, a well-planned strategy ensures that families maximize financial aid when planning for college. If you would like to read more about planning for young adult children, please visit our previous posts.

References: Saving for College (Aug. 10, 2023) “FAFSA Errors That Affect the Amount of Financial Aid”

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What Kind of Trust Helps a Family with Young Children?

March 11, 2025

Trusts are not just for wealthy people. They are used when a family has young children and wishes to ensure that there is a plan in place to care for the children in case the parents die or become incapacitated. A recent article from Business Insider, “I asked an estate planning attorney the best way to establish a trust for my 2-year-old daughter,” explains what parents can do to protect their youngest loved ones. What kind of trust helps a family with young children?

There are a few different trusts to consider, depending on your situation:

Revocable Living Trust. The revocable trust is the most flexible. It is a separate legal entity with language directing how assets will be used for different scenarios. For instance, if someone dies or becomes disabled and their beneficiaries are all children, the trustee will manage and allocate necessary financial resources to support the children. Many estate planning attorneys consider a trust even more important than a will, since it doesn’t require the estate to be settled before trustees can access the assets.

An IRA Trust. You may want to consider creating an IRA trust if you own an IRA. This allows a minor child to be the beneficiary of the retirement account. On the death of the IRA owner, assets go into the trust, which has a trustee who manages the asset until the person comes of age or whenever the original owner wants them to receive the money.

When a regular IRA account is left to a minor, the family must petition the court to obtain a court-appointed guardian to manage the account until the minor is of legal age. With an IRA trust, you’ve clarified who the trustee should be and when the child will receive the money. If the money is not needed and can remain in the trust, it is a protected asset for their future.

A Trust for Minors. This allows you to leave assets to a child until they reach a certain age, which you articulate in the trust. You can leave all or a portion of the money to the beneficiary to be distributed when you feel they can manage it. You decide when to release the funds, who the trustee should be, the rules for how the money is to be spent and when the minor may receive income.

An Education Trust. In addition to creating a 529 College Account for a minor child, it’s a good idea to create an Education Trust to be sure the funds will be used for education. You can assign a certain amount for education and state the age you’d like the beneficiary to receive any leftover funds.

An estate planning attorney can help identify what kind of trust helps a family like yours with young children. It will give you the peace of mind knowing that you created a plan for your children or grandchildren to ensure that they have the funds they need in case of tragedy, and place guardrails on the money so it’s protected. If you would like to learn more about estate planning for young children, please visit our previous posts.

Reference: Business Insider (Jan. 31, 2025) “I asked an estate planning attorney the best way to establish a trust for my 2-year-old daughter”

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Self-Employed must take a Proactive Approach to Estate Planning

January 16, 2025

Freelancers and the self-employed must take a proactive approach to estate planning. These types of jobs operate without the safety nets provided by traditional employment. This independence brings freedom. However, it also adds complexity to financial and estate planning. From managing irregular income to protecting business assets, creating an estate plan ensures that your hard work is preserved and distributed according to your wishes.

Unlike salaried employees, freelancers often lack access to employer-sponsored benefits, such as life insurance, retirement plans, or disability coverage. Their business assets and personal finances are frequently intertwined, making careful planning essential to avoid unnecessary complications for heirs.

A well-crafted estate plan for freelancers addresses:

Transfer of business assets or intellectual property.
Continuity of income for dependents.
Minimization of taxes and legal hurdles.

Freelancers and the self-employed must create a plan that considers their unique financial circumstances and provides long-term security for loved ones.

Freelancers often rely on their business as their primary source of income. Without a plan, the value of that business could be lost upon their death. Key steps include:

Appointing a Successor: Identify someone to take over the business or handle its sale.
Creating a Buy-Sell Agreement: Outline how ownership interests will be transferred for partnerships or joint ventures.
Documenting Procedures: Maintain clear records and instructions to help successors understand ongoing operations or intellectual property management.

Freelancers often experience fluctuations in income, which can complicate traditional estate planning strategies. To account for this:

Establish a rainy-day fund to provide a financial buffer for your estate.
Work with an estate planning attorney to identify flexible asset protection strategies.
Consider annuities or investments that provide steady income streams for beneficiaries.

Unlike traditional employees, freelancers must set up their own retirement savings plans. Options include:

SEP IRAs or Solo 401(k)s: Tax-advantaged accounts tailored for self-employed individuals.
Roth IRAs: Flexible savings accounts that grow tax-free, offering greater liquidity for heirs.

Ensuring that retirement savings are properly designated to beneficiaries avoids complications later.

The self-employed often own valuable digital assets like intellectual property, domain names, or online portfolios. These assets must be included in your estate plan to ensure seamless transfer. Create an inventory of:

Login credentials for key accounts.
Ownership documentation for websites or digital products.
Instructions for transferring or licensing intellectual property.

Many self-employed generate income from intellectual property, such as writing, artwork, or designs. An estate plan should specify how copyrights, patents, or trademarks are managed after death. This may include:

Assigning ownership to heirs or beneficiaries.
Creating trusts to manage royalty payments.
Licensing or selling rights to preserve income streams.

The first step to creating an estate plan is drafting a will that distributes assets, business interests and personal property according to your wishes. Without one, state laws determine asset distribution, which can result in unintended consequences. However, there’s much more to an estate plan than just making a will.

Establish Powers of Attorney

Freelancers should designate a trusted person to handle financial and healthcare decisions, if they become incapacitated. Powers of attorney ensure continuity in managing personal and business affairs during emergencies.

Consider a Living Trust

A living trust can help freelancers avoid probate and ensure that assets are distributed efficiently. Trusts are beneficial for managing complex assets, like intellectual property or business income.

Secure Life Insurance

Life insurance provides a safety net for freelancers with dependents by replacing lost income and covering future expenses. Policies should be aligned with your estate plan to ensure that benefits are directed appropriately.

Reach Out to an Estate Planning Attorney

Freelancers should consult estate planning attorneys and financial/tax advisors to create a plan that addresses their unique circumstances. Regular reviews ensure that the plan evolves alongside income, assets, or family structure changes.

Freelancers and the self-employed must take a proactive approach to estate planning. You can ensure your hard-earned legacy benefits your loved ones by addressing business continuity, income fluctuations and digital assets. An estate plan tailored to your needs secures your financial future and provides peace of mind, knowing that your assets and values will be protected. If you would like to learn more about planning for the self-employed, please visit our previous posts.

Reference: American College of Trust and Estate Counsel (ACTEC) (Oct. 19, 2023) “Estate Planning for Freelancers and the Gig Economy”

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A Trust Only Works if it is Properly Funded

January 9, 2025

A revocable trust is a powerful estate planning tool that helps individuals manage their assets during their lifetime and distribute them efficiently after their death. However, a trust only works if it is properly funded. The American College of Trust and Estate Counsel explains that many individuals make the mistake of setting up a trust but fail to transfer assets into it. This leaves their estates vulnerable to probate, taxes and disputes. To fully benefit from your trust, you must ensure that it is appropriately funded with all intended assets.

What It Mean to Fund a Trust

Funding a trust involves transferring ownership of assets from your name into the trust’s name. This step gives the trust legal control over the assets, allowing them to be managed and distributed according to the terms of the trust. Without this transfer, your assets may remain subject to probate, and your trust could become an ineffective document.

Key asset types that can and should be transferred into a trust include:

Real estate properties
Bank and investment accounts
Tangible personal property, such as valuable jewelry, artwork, or collectibles
Business interests and intellectual property
Life insurance policies (with the trust named as the beneficiary)

By funding your trust, you ensure that these assets are managed seamlessly during your lifetime and distributed efficiently upon your death.

Why Trust Funding is Essential

Failing to fund a trust undermines its primary purpose. If assets remain outside of the trust, they may become subject to probate—the often lengthy and costly legal process of settling an estate. This can delay the distribution of assets to your heirs and increase the likelihood of disputes among family members.

A funded trust also provides benefits that unfunded trusts cannot, including:

Privacy: Unlike wills, which become public records through probate, trusts keep the details of your estate private.
Control: Funding the trust ensures assets are distributed according to your wishes without interference from courts or state laws.
Continuity: In the event of incapacity, the trust enables a successor trustee to manage your assets without court intervention.

How to Fund a Trust

Properly funding a trust requires transferring ownership of assets into the trust and ensuring that documentation is updated to reflect the change. Each asset type requires specific steps:

Real Estate

To transfer real estate, you must execute a deed transferring ownership to the trust. This often involves recording the new deed with the local land records office. Consult an estate lawyer to ensure that the transfer complies with state laws and doesn’t inadvertently trigger taxes or other issues.

Bank and Investment Accounts

Banks and financial institutions typically require documentation to retitle accounts in the name of the trust. This might involve filling out specific forms or providing a copy of the trust agreement. Failing to update account ownership could result in these assets being excluded from the trust’s control.

Tangible Personal Property

A written assignment can transfer tangible personal property to the trust, such as art, heirlooms and jewelry. The assignment lists the items being transferred and formally declares their inclusion in the trust.

Life Insurance and Retirement Accounts

While retirement accounts, like IRAs and 401(k)s, are not typically retitled to a trust for tax reasons, you can name the trust as a beneficiary. For life insurance policies, updating the beneficiary designation to the trust ensures that proceeds are directed according to the trust’s terms.

Business Interests

If you own a business, transferring shares or interests into the trust allows the trustee to manage them as needed. This requires amending operating agreements, stock certificates, or partnership documents to reflect the transfer.

Common Pitfalls to Avoid

Even with good intentions, individuals often make mistakes when funding their trusts. Common errors include:

Leaving assets out of the trust: Forgetting to transfer all intended assets undermines the trust’s effectiveness.
Failing to update beneficiary designations: Beneficiary forms conflicting with trust terms can create legal disputes.
Not reviewing the trust regularly: As assets change over time, it’s essential to revisit and update the trust to include new acquisitions.

An estate lawyer can guide you through the process and help ensure that all assets are correctly transferred and documented. Remember, a trust only works if it is properly funded. It is a living document that requires ongoing attention. Regularly reviewing and updating the trust ensures it remains aligned with your goals and includes all current assets. Properly funding your trust provides security for your loved ones, avoids unnecessary legal complications and ensures that your legacy is preserved. If you would like to learn more about funding a trust, please visit our previous posts.

References: American College of Trust and Estate Counsel (ACTEC) (Aug. 31, 2023) “Funding Your Revocable Trust and Other Critical Steps” and American College of Trust and Estate Counsel (ACTEC) (Sep 21, 2023) “Tangible Personal Property in Estate Planning”

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Proper Estate Planning can Protect Couples with Big Age Gaps

October 30, 2024

A decade-sized age gap doesn’t seem like much when you are 38 and he’s 57. However, as you get older, the age difference can lead to challenges, including those concerning estate planning and long-term care. Proper estate planning can protect couples with big age gaps. There needs to be enough resources for the surviving spouse if the older spouse passes first, which isn’t always the case. According to a recent article, “Estate Planning for May—December Couples,” from Next Avenue, finances, wills and estate plans must consider the age difference.

The U.S. Census Bureau reports the average age gap in traditional marriages as 3.69 years. However, in some Western countries, about 8% of all traditional couples have an age gap of 10 years or more.

One couple had a nearly 20-year age gap when they sat down with an advisor. The husband had three grown children from a prior marriage and didn’t want to put his second wife’s financial security in jeopardy if he should die first. His will needed to be drafted so she would inherit the home outright, while also providing his three children with an equal share of remaining assets after a certain period.

Naming someone who is not also a beneficiary to be the executor of your estate may be especially helpful here. Someone who isn’t going to benefit from an inheritance may be more objective about how assets are distributed. During their years of practice with families of all types, experienced estate planning attorneys see all kinds of family situations, including couples in subsequent marriages with large age gaps. They can help navigate the best way for wealth to be distributed to protect both the younger spouse and any children from prior marriages.

A few essential tasks:

Review and update beneficiary designations on accounts like life insurance, retirement accounts and other assets.

Be clear in conversations about your intentions for personal property and document your wishes in your will. Family disputes over heirlooms, regardless of their value, can happen if you haven’t put those wishes in writing.

If the older spouse dies and the young one remarries, it’s possible the new spouse could inherit the older spouse’s assets unless good estate planning is done. The older spouse may consider leaving assets in a marital trust designed to benefit the surviving spouse. This way, the surviving spouse has access to funds as needed. However, upon the surviving spouse’s death, the assets go to the older spouse’s other beneficiaries.

Couples should always have a Power of Attorney, Health Care Power of Attorney and Living Wills created when working with an estate planning attorney. The medical power of attorney allows another person to make medical decisions in case of incapacity. A Living Will outlines what treatments you do or don’t want if you are terminally ill or injured. These documents vary by state and, just like your will, should be personalized to reflect your wishes. An estate planning attorney will show you how proper estate planning that can protect couples with big age gaps. If you would like to learn more about planning for couples, please visit our previous posts.

Reference: Next Avenue (Sep. 5, 2024) “Estate Planning for May—December Couples”

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Understanding Primary and Contingent Beneficiaries is essential for Estate Planning

September 3, 2024

Creating an estate plan is the most important way to ensure that your wishes will go into effect after you pass away. During estate planning, you’ll have to designate beneficiaries. Understanding the difference between primary and contingent beneficiaries is essential for estate planning. Knowing this distinction can make your estate plan more comprehensive and effective, giving you peace of mind that your loved ones will be okay when you’re gone.

A primary beneficiary is the person or entity you choose to receive your assets first when you pass away. This could be a spouse, a child, a friend, or even a charity. When you set up a will, trust, or other financial accounts, like life insurance or retirement, you’ll be asked to name one or more primary beneficiaries.

You might name your spouse as the primary beneficiary if you have a life insurance policy. If you pass away, your spouse will receive the payout directly.

Choosing a primary beneficiary ensures that your assets go to the person or organization you want them to benefit. It can also help avoid conflicts among family members and ensure a smooth transfer of assets. You minimize the chances of disputes and legal challenges by clearly designating who should receive your assets.

Life is unpredictable, and there might be situations where your primary beneficiary cannot receive your assets. They might predecease you, be unable to be located, or simply refuse the inheritance. This is where a contingent beneficiary comes into play.

A contingent beneficiary, or secondary beneficiary, is essentially a backup beneficiary. The contingent beneficiary is next in line if the primary beneficiary cannot receive the assets. For instance, if your spouse is the primary beneficiary and they pass away before you, your contingent beneficiary will receive the assets instead.

According to ElderLawAnswers, naming a contingent beneficiary is essential in estate planning. A contingent beneficiary is designated to receive your assets if your primary beneficiary cannot do so.

This additional layer of planning provides security and peace of mind, guaranteeing that your assets are passed on as you intended, regardless of any unexpected events involving your primary beneficiary. Your wishes will remain clear even in unforeseen circumstances, and your estate plan will carry them out.

Yes, you can designate multiple primary and contingent beneficiaries. This is particularly useful if you have a large estate or multiple heirs. For example, you might want to divide your estate equally among your children. In this case, you can name all your children as primary beneficiaries, each receiving a specified percentage of your assets.

When you have multiple primary beneficiaries, your assets are divided according to the percentages you specify. If one of the primary beneficiaries cannot receive their share, their portion can be reallocated to the remaining primary beneficiaries or passed on to the contingent beneficiaries.

You can similarly have multiple contingent beneficiaries. For example, you might name your spouse as the primary beneficiary and your two children as contingent beneficiaries. If your spouse cannot receive the assets, your children would then receive the assets consistent with your instructions.

While beneficiaries are individuals you choose to receive your assets, heirs-at-law are entitled to inherit from you under state law if you don’t have a will. Without an estate plan, state intestacy laws will distribute your assets. This usually goes to your closest relatives, such as your spouse and children. Designating primary and contingent beneficiaries allows you to control who receives your assets rather than leaving it to state law.

Life circumstances change, and so should your estate plan. Major life events such as marriage, divorce, the birth of a child, or the death of a beneficiary may require updates to your beneficiaries. Regularly reviewing and updating your estate plan ensures that it remains aligned with your current wishes and life situation.

Understanding the roles of primary and contingent beneficiaries is essential for robust estate planning. It ensures that your assets are distributed according to your wishes, even in unexpected circumstances.

An experienced estate planning attorney can help you designate beneficiaries, create a comprehensive estate plan and provide peace of mind for you and your loved ones. If you would like to learn more about beneficiaries and their role in estate planning, please visit our previous posts.

Reference: ElderLawAnswers (May 20, 2024) “What Is a Contingent Beneficiary?”

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Charitable Remainder Trusts may be Solution to Stretch IRA loss

June 6, 2024

For many years, the Stretch IRA was used to leave assets to heirs very tax-efficiently. Then came the SECURE Act, according to the article “Charitable Remainder Trust: The Stretch IRA Alternative” from Kiplinger. The ability for IRA beneficiaries to take the smallest of RMDs (Required Minimum Distributions) annually and leave a large sum in the IRA to grow tax-deferred over their lifetimes was over. Charitable Remainder Trusts may be solution to the loss of the Stretch IRA.

The SECURE Act in 2019 brought significant changes, taking away a valuable tool from anyone who died after Dec. 31, 2019. The new rules require the entire amount in an inherited IRA to be withdrawn by the end of the tenth year of the original account owner’s death. These withdrawals are taxable, so instead of stretching the withdrawal out over an extended period, accounts must be emptied, and taxes paid within a relatively short period. Compared to the stretch, the Ten-Year Rule is, in a word, taxing. It’s crucial to understand these changes and their implications.

There are exceptions to the rule for certain beneficiaries, including spouses and disabled individuals, non-spouse beneficiaries no more than ten years younger than the original account owner and a biological or adopted minor until they reach age 21. On their 21^st birthday, they have ten years to empty the account.

There are alternative strategies for IRA owners to consider to help heirs enjoy more of their legacy, which an experienced estate planning attorney will know. One is the Charitable Remainder Trust (CRT), which offers both tax benefits and charitable giving.

Start by designating a CRT as the beneficiary of your IRA. When you die, the assets will pass to the CRT. Since the CRT is a tax-exempt entity, the assets in the IRA continue to grow tax deferred. The CRT’s beneficiaries receive income distributions over a specified period. At the end of the CRT, any remaining funds go to a charitable beneficiary.

CRT beneficiaries may receive distributions over a much longer period than a direct inheritance or inherited IRA, which has a mandated 10-year distribution.

If you are seeking a solution to the loss of your Stretch IRA, a Charitable Remainder Trust may be a solution. The CRT strategy is best for charitably minded people who would have donated to the charity regardless of the IRA restrictions. If this aligns with your values, it makes sense from an estate planning perspective. There are costs associated with setting up a CRT, which should be considered when considering the totality of your estate plan. Speak with your estate planning attorney to see if this makes sense for you and your family. If you would like to learn more about CRTs, please visit our previous posts.

Reference: Kiplinger (April 19, 2024) “Charitable Remainder Trust: The Stretch IRA Alternative”

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Key Estate Planning Strategies for Executives

May 23, 2024

Executives manage complex financial landscapes while striving for professional success, creating unique estate planning goals and challenges. Central Trust Company shared insights in the article “Estate Planning For Executives,” which focused on liquidity concerns, tax efficiency and beneficiaries for certain assets. This article explores key estate planning strategies for executive’s unique goals.

Executives often face liquidity challenges and may have a significant portion of their wealth tied up in company stock. Diversifying investments and implementing strategies to manage concentrated stock positions are critical to mitigate risk and enhance financial security.

Navigating tax-efficient giving strategies is essential for executives looking to give back to their communities or support charitable causes. Estate planning considerations, including lifetime gifts and the transfer of vested stock options, play a crucial role in preserving wealth and minimizing tax liabilities.

Transitioning from a successful career to retirement can be exciting and daunting for executives. Planning for retirement involves forecasting complex benefits, managing investment portfolios and ensuring a smooth transition from the accumulation phase to the distribution phase of their financial life.

Comprehensive estate planning for executives includes strategies that address their income tax bracket, estate tax rates and various types of investments. Strategies such as wills, trusts, powers of attorney (POAs) and advance directives are central to protecting an executive’s assets and support building wealth.

A knowledgeable and experienced estate planning attorney is central to a holistic plan that meets an executive’s goals, including:

Reducing taxes and taxable estate values.
Transferring stock options and other nuanced investments to heirs.
Preserving or building their wealth.

Key Estate Planning Strategies For Executives:

Address Unique Challenges: Consider liquidity, stock options, estate taxes and beneficiaries.
Maximize Tax-Efficiency: Explore tax-efficient strategies to preserve wealth.
Build a Comprehensive Plan: Include wills, trusts, and POAs to address diverse financial needs and goals.
Define Personal Objectives: Define personal philosophies and objectives to create a comprehensive plan that aligns with your vision for the future.

Given the complexities of their careers and wealth management needs, executives face unique financial and estate planning challenges. Addressing key concerns and defining personal objectives helps executives secure a financial future for themselves and their families. If you would like to learn more about estate planning for wealthy couples and families, please visit our previous posts.

Reference: Central Trust Company (July 19, 2023) “Estate Planning For Executives”

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Use Qualified Disclaimer to Avoid Inheriting IRA

March 5, 2024

The rules governing inherited Individual Retirement Accounts (IRAs) have changed over the years. They have become even more complex since the passage of the original SECURE Act. The inheritor of an IRA may be required to empty the account and pay taxes on the resulting income within 10 years. In some situations, beneficiaries might choose to use a Qualified Disclaimer to avoid inheriting the IRA, according to a recent article, “How to Opt Out of Inheriting an IRA” from Think Advisor.

Paying taxes on the distributions could put a beneficiary into a higher tax bracket. In some situations, beneficiaries may want to execute a Qualified Disclaimer and avoid inheriting both the account and the tax consequences associated with the inheritance.

Individuals who use a Qualified Disclaimer are treated as if they never received the property at all. Of course, you don’t enjoy the benefits of the inheritance but don’t receive the tax bill.

Suppose the decedent’s estate is large enough to trigger the federal estate tax. In that case, generation-skipping transfer tax issues may come into play, depending on whether there are any contingent beneficiaries.

An experienced estate planning attorney is needed to ensure that the disclaimer satisfies all requirements and is treated as a Qualified Disclaimer. It must be in writing, and it must be irrevocable. It also needs to align with any state law requirements.

The person who wishes to disclaim the IRA must provide the IRA custodian or the plan administrator with written notice within nine months after the latter of two events: the original account owner’s death or the date the disclaiming party turns 21 years old. The disclaiming person must also execute the disclaimer before receiving the inherited IRA or any of the benefits associated with the property.

Once you use the qualified disclaimer to avoid inheriting the IRA, it must pass to the remaining beneficiaries without the disclaiming party’s involvement. The disclaiming party cannot directly decide who will receive their interests, such as directing the inherited IRA to go to their child. If the disclaiming party’s child is already named as a beneficiary, their interest will be received as intended by that child.

The person inheriting the account must execute the disclaimer before receiving any benefits from the account. Even electing to take distributions will prevent the disclaimer from being effective, even if the person has not received any funds.

In some cases, you may be able to disclaim a portion of the inherited IRA. However, these are specific cases requiring the experience of an estate planning attorney. If you would like to learn more about inherited IRAs, please visit our previous posts.

Reference: Think Advisor (Feb. 8, 2024) “How to Opt Out of Inheriting an IRA”

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Integrating Retirement Accounts into your Estate Plan

February 13, 2024

Retirement accounts, such as IRAs and 401(k)s, play a pivotal role in many estate plans. They are not just savings vehicles for retirement; they are also crucial assets that can be passed on to beneficiaries. An effective estate plan should integrate retirement accounts seamlessly, supporting your overall retirement and estate objectives.

When incorporating retirement accounts into an estate plan, it’s essential to understand the tax implications and the rules governing beneficiary designations. These factors can significantly impact how your retirement assets are distributed and taxed upon your death. Retirement accounts are subject to income tax and, in some cases, estate tax.

Retirement accounts, such as IRAs and 401(k)s, typically bypass the probate process, as they are transferred directly to the named beneficiaries. This direct transfer can simplify the estate settlement process and provide quicker access to funds for your beneficiaries. It’s important to understand that while retirement accounts may avoid probate, they are still part of your overall estate for tax purposes. Proper planning can help ensure that your retirement assets are distributed efficiently and tax-advantaged.

Roth IRAs are unique retirement accounts that offer tax-free growth and withdrawals. They can be a valuable tool in estate planning, particularly for those looking to leave tax-free assets to their beneficiaries. Unlike traditional IRAs, Roth IRAs do not require minimum distributions during the account owner’s lifetime, allowing the assets to grow tax-free for a longer period.

When including Roth IRAs in your estate plan, consider the potential tax benefits for your beneficiaries. Since distributions from Roth IRAs are generally tax-free, they can provide a significant financial advantage to your heirs. Tax-deferred retirement accounts, like traditional IRAs and 401(k)s, allow contributions to grow tax-free until withdrawal. This feature can lead to significant tax savings over time. However, it’s essential to consider the tax implications for your beneficiaries.

Beneficiary designations are a critical aspect of retirement planning. These designations determine who will inherit your retirement accounts upon your death. It’s crucial to regularly review and update your beneficiary designations to ensure that they align with your current estate plan and wishes. Failure to update beneficiary designations can lead to unintended consequences, such as an ex-spouse or a deceased individual being named as the beneficiary. Beneficiaries are generally subject to income tax on the distributions upon inheriting a tax-deferred retirement account. Planning for these tax implications is crucial in ensuring that your beneficiaries are not burdened with unexpected taxes.

Retirement assets are considered part of your estate and can impact your overall estate value and tax liability. Properly integrating retirement accounts into your estate plan can help achieve a balanced and tax-efficient distribution of your entire estate. This includes considering the impact on federal and state estate taxes and the income tax implications for your beneficiaries.

In conclusion, integrating retirement accounts into your estate plan is a complex but essential task. Understanding the nuances of how these accounts work in the context of estate and tax planning can ensure that your financial legacy is preserved and passed on according to your wishes. Consultation with financial and legal professionals is key to navigating this intricate aspect of estate planning effectively. If you would like to learn more about retirement accounts, please visit our previous posts.

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Category: IRA

A Well-Planned Strategy ensures Families maximize Financial Aid when planning for College

What Kind of Trust Helps a Family with Young Children?

Self-Employed must take a Proactive Approach to Estate Planning

A Trust Only Works if it is Properly Funded

Proper Estate Planning can Protect Couples with Big Age Gaps

Understanding Primary and Contingent Beneficiaries is essential for Estate Planning

Charitable Remainder Trusts may be Solution to Stretch IRA loss

Key Estate Planning Strategies for Executives

Use Qualified Disclaimer to Avoid Inheriting IRA

Integrating Retirement Accounts into your Estate Plan

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