Florida Estate Planning, Probate and Asset Protection

Remember to Take RMD from Inherited IRA

If you inherit the IRA of an individual who has a required distribution for the year, you – as the beneficiary – must take any remaining required minimum distribution (RMD).

Not all assets are inherited in the same way. Take IRAs, for example. When does the IRA of your deceased spouse become “yours,” what should you do with it, and what do you need to know to stay out of tax trouble?

The Slott Report recently addressed the consequences of when a surviving spouse inherits the IRA of their deceased spouse and both have reached age 70 ½, the age for Required Minimum Distributions (RMDs). The article titled “Inherited IRA: When do You Own It?” noted that one must be very careful.

For starters, the inheriting spouse must be the “designated” beneficiary. Assuming that is the case, what happens when your spouse dies in December and has not withdrawn the required RMD? Must you as the surviving spouse calculate your RMD on both account balances, your spouse’s and your own?

RMDs are always tricky because the penalties are steep, with a 50% penalty tax on the amount required but not taken.

Bottom line: be sure to get competent legal and tax advice before proceeding if you are the designated beneficiary of an inherited IRA.

Reference: The Slott Report (May 6, 2013) “Inherited IRA: When do You Own It?”

Mind the Post-Mortem RMD on an Inherited IRA

If you are the beneficiary of a deceased IRA owner, you have to begin taking required minimum distributions (RMDs). In some cases, there is an RMD you must take in the year the IRA owner dies.

When an elderly loved one passes away, their legal and financial affairs come to an end. However, there is an important exception – their final RMD on their IRA.

Many surviving designated beneficiaries of a decedent’s IRA do not realize that Required Minimum Distributions (RMDs) have to be taken annually and up to the end, even if the owner died earlier in that year. In fact, the year of death IRA distribution is a requirement that is easy to miss.

Recently, The Slott Report took up this matter in an article titled “Taking the Year of Death IRA Minimum Distribution.”

Essentially, the RMD is required because there is an attending tax burden involved. As you likely are aware, any individual over the age of 70 ½ must take RMD from their IRA. When it comes to the year of death for such an individual, their designated beneficiary of the IRA beneficiary must take the RMD even before inheriting the IRA itself.

OK; simple enough. The trouble is that it is difficult to track whether the decedent had already taken their full RMD in the year of their death. For example, were they on a monthly installment plan? Were they waiting until the last moment? Did they miscalculate?

So, what is the penalty for failing to take the full RMD? Would you believe a whopping 50% of the shortfall?!

If you are the IRA owner, then you can see how accurate and communicated recordkeeping can help your loved ones (i.e., your designated beneficiaries) avoid an unpleasant treasure hunt to determine the post-mortem status of your RMD.

Reference: The Slott Report (April 30, 2013) “Taking the Year of Death IRA Minimum Distribution”

Pay Close Attention to Beneficiary Designations

Most individuals do not give the necessary attention to how they designate their beneficiaries. In many cases, the very professionals you rely on to provide proper advice are either not aware of how to do it or do not make it a priority. Unfortunately, in either case, the potential consequences include loss of control, loss of significant money, and the incalculable effect it can have on family harmony.

Naming beneficiaries seems pretty straight forward, but there may come a time when you forget who you’ve selected on various accounts. Thankfully there are shortcuts around this issue, you just have to know when and where to take them.

When it comes to proper estate planning, the shortcuts are the existing options you already have with insurances and retirement accounts that allow you to designate your beneficiaries on a simple beneficiary designation form.

For many of us, the beneficiary form is the first practical experience we have with estate planning. For thoughtful and downright tactful tips for designating your beneficiaries designations, consider a recent article in Fox Business titled “Bulletproofing Your Beneficiaries.”

When it comes to beneficiary designations, some of them are shortcuts and some of them are dead-ends, and still others can completely undo your estate plans if you simply forget about them. That noted, there are at least two key points to consider. The second point is the beneficiary designation must be coordinated with your overall estate plan to the right beneficiaries (or even a system of trusts) to eliminate probate and minimize taxes. The first point, and a source of immediate concern, is that you must know who all of your beneficiaries are on all your accounts at all times.

If you don’t know all of your beneficiaries, is it time for a “beneficiary audit” of all your accounts? You may want to consider reworking those designations to meet your distribution goals and ensure that your plans will end up as you intended.

Reference: Fox Business (October 1, 2012) “Bulletproofing Your Beneficiaries”

Estate Taxes – The Gift That Keeps on Taking

When you inherit money or property you shouldn’t have to pay taxes. It’s not subject to income tax. Plus, if there’s an inheritance tax to pay, the estate or person giving it to you has already paid it or provided for its payment. At least that’s how it’s supposed to work. But what if it turns out the estate tax was not paid, or there’s an audit and the estate owes more?

Death does not necessarily mark the end of your estate. In fact, for some Orlando families, it may mean the beginning of your financial legacy. On the other hand, for other families, it may mean the beginning of some serious taxes.

The prospect of future tax battles with the IRS was the subject of the recent case of U.S. v. Mary Carol S. Johnson. Forbes explored this case in an article titled “When Estates Don't Pay Tax, IRS Chases Beneficiaries.”

The case recounts the story of Anna Smith, her fortunes in the Stateline Hotel, and the IRS audit that ultimately led to a battle over a lost fortune. Smith’s fortune was bound up in stock in the hotel, and it was worth enough at her passing to trigger an estate tax that the family elected to pay in installments over several years (which can be done). According to her estate plan, the family distributed the stock amongst themselves under an agreement to set aside a portion to pay the estate taxes owed.

Apparently that agreement was reached in the “good days” of the hotel. In fact, those days were so good that the IRS audit on the estate tax return, years later, came up with higher numbers and a greater tax. Of course, when the IRS finally got around to making that decision, the hotel was not doing so well. However, the family agreed to pay the higher tax as a matter of duty and paid on those rates for several years.

Boom. The hotel value collapsed, the stock became worthless, and the estate had nothing left to pay for the taxes on the past wealth. The IRS, not being one to forgive and forget, didn’t forget and carried on the fight to the beneficiaries and personal representatives of the estate. In the end, the IRS held two members of the family acting as personal representatives to be personally liable, even though they did the right thing by the original numbers.

The original article is an interesting read and a sobering reminder, albeit far from unique. The IRS can audit any taxpayer, even if it’s an estate, and sometimes it has good reasons to do so. As a sidebar, the case demonstrates the importance of an accurate valuation.

Regardless, this U.S. v. Mary Carol S. Johnson serves as a lesson for those currently planning their estates. With the current lifetime gifting exemption pegged at $5.12 million, this may be a window of opportunity to pass significant wealth before the year’s end.

Bottom line: If the estate doesn’t fully pay off any amounts due, the IRS turns to the estate beneficiaries, sometimes even for amounts forgotten until years later.

Reference: Forbes (June 28, 2012) “When Estates Don't Pay Tax, IRS Chases Beneficiaries”

RETIREMENT ACCOUNTS – DISTRIBUTION RULES ARE COMPLEX

As the amount of money stashed in 401(k)s and individual retirement accounts has grown, more and more families are finding themselves locked in battles over who has rights to the assets.

Even with the many concerns over retirement accounts in America, it’s undeniable - IRAs and 401(k)s represent a lot of personal wealth for everyday Americans. That means retirement accounts are assets uniquely worthy of particular attention, to include when it comes to their role in your estate planning. Indeed, amongst households with at least $100,000 to invest, 60% of the household’s assets are in an IRA or 401(k).

So, how ought retirement accounts factor into your estate planning. Who will inherit them? The answer is not a simple as you may think. Truth be told, the problem with retirement accounts is the crazy quilt of laws governing their distributions, and moreover, different laws apply to 401(k)s and IRAs.

The inheritance of retirement accounts is a lively topic and none other than The Wall Street Journal has recently offered a piece on the issue. While I commend the full article to your reading file, let’s review a few of the highlights here.

With 401(k)s, the overarching rules are in place thanks to the federal Employee Retirement Income Security Act (ERISA). If you are married, the 401(k) automatically passes to your spouse and does so regardless whether your spouse is the designated beneficiary, unless your spouse waives his or her right to your 401(k). By the way, if you have a premarital agreement, your intended spouse cannot effectively waive rights in your 401(k) until you are actually married. Plan accordingly.

What if you have children from a former marriage and you want to include them as beneficiaries along with your new spouse? Consider “rolling” your 401(k) into an IRA and making the beneficiary designations per your wishes, even if your children are beneficiaries under your will and trust.

Teaching point: The beneficiary designations on file with the retirement plan administrator trump any contrary arrangements in your will and trust. In fact, the U.S. Supreme Court has ruled that, despite any state law to the contrary, your ex-spouse will inherit your 401(k), if he or she is the last designated beneficiary on file with the plan administrator.

IRAs are governed by state law and that, by and large, makes them more pliable. Without the inflexibility of the ERISA laws, when it comes to your IRA it’s all about the named beneficiary (unless there is a state law to the contrary). One thing remains consistent, however. The beneficiary on file with the plan administrator takes precedence over any provisions under your will and trust. Exceptions: Some state laws rule out the complete disinheritance of a spouse and some have laws automatically disinherit an ex-spouse as beneficiary, unless you’ve completed the extra paperwork to confirm your intent to include your ex-spouse as beneficiary.

Bottom line: Retirement accounts, whether 401(k)s or IRAs, are important assets for many Americans. Given the complex tangle of laws that control your options, it is essential that you consult with competent legal counsel and coordinate the distribution of your retirement accounts as part of your overall estate planning. Be sure to consult an estate planning attorney admitted in your state of residence, as state property laws may need to be evaluated, too. 

Reference: The Wall Street Journal (September 7, 2011) “Family Feuds: The Battle Over Retirement Accounts”

 

ESTATE PLANNING / BENEFICIARY DESIGNATIONS

Think your estate planning is done once you've gone to the trouble of making a will? Think again. All your hard work can be undone with a stroke of a pen when you open a bank, brokerage or retirement account.

What is the quickest way to un-do an otherwise carefully planned estate?

Open a bank account, brokerage or retirement account.

Why? Because the beneficiary designations on these accounts override your will. Yes, it’s true – the beneficiary designation is the estate planning trump card. And many an estate plan has come undone because of carelessly named beneficiaries.

The Wall Street Journal last week issued a warning in an article entitled Beware the Beneficiary Form.

“People don’t realize the importance of this,” says Martin Shenkman, an estate planning lawyer in Paramus, NJ. A carelessly named beneficiary on a financial account can cause a loved one to be disinherited, a disabled child to lose government benefits, and heirs to be slapped with a big tax bill.

The Journal also offers a few tips to protect you from this type of estate plan destruction, to include:

Know what kinds of accounts have beneficiary designations. Did you know that U.S. Savings bonds have a beneficiary form? Other accounts for which you may have named a beneficiary include retirement accounts, life insurance policies, bank accounts, certificates of deposit, stocks, bonds and mutual funds.

Review your beneficiary designations regularly and certainly after any life-changing event such as a marriage, divorce, birth or death of a loved one. Also, job-changers and retirees take note: Beneficiary designations on retirement plans don’t carry over when you roll a 401(k) to a new employer’s plan or to an IRA, or when you convert a regular IRA to a Roth IRA.

Learn more about beneficiary designations in the August 2010 issue of our newsletter, aptly titled Beneficiary Designations.

Reference:  The Wall Street Journal (July 6, 2011) “Beware the Beneficiary Form”

 

ESTATE PLANNING / EXECUTORS

"So in the case of choosing an executor, who should get the job, what are the fees and what should you expect? There are a few things to consider when answering these questions." 

There are a number of decisions to be reached when planning for your estate and not least among them is the choice of executor. A poor choice of an executor, or a disconnection between executor, estate, and beneficiaries can hobble even the best laid of estate plans. Indeed, Reuters offers one unfortunate beneficiary’s troubles in a recent article on the topic and offers some solid suggestions to consider.

The beneficiary was Stephanie Stephens, who, in the end, was surprised to find that the estate she received had shrunk by $129,000, something she angrily blames on the executor. Apparently, the estate had incurred a $104,000 loss when the executor failed to pull the assets from the flames of the 2008 financial meltdown and, insult to injury, that executor was then entitled to a fee of another $25,000. Needless to say, she wasn’t happy. Whether or not the executor was to blame may be debatable (since it was the beginning of the recession, after all) but there are other wrinkles to the story. For example, Stephanie hadn’t met the executor of the estate until after her relative passed away and so only knew him as a somewhat disinterested party. Further, she was surprised by the executor’s fees even and even felt them to be excessive.

In this case, the beneficiary was, at best surprised (and at worst, victimized) by a situation she did not understand. Her case offers an example of a kind of disconnect that can all-too-easily arise between executor, estate, and beneficiary.

Reuter’s offers three general principles to bear in mind:

Know the estate. Choosing the right executor has a lot to do with the nature of your estate. Is it complex or simple? Are there a lot of moving parts and assets that may be at risk? A family member can likely carry out a simple estate but a professional might be necessary for those more difficult ones.

Know the person. Just because someone is a “good person,” this does not mean they should be doing business for you. You need to know that they are well-intentioned and interested in carrying out the tasks, but above and beyond that you must also know that they have the proper skills and business mindset to carry out your plans and take care of your assets in your absence.

Let your family know - communicate. It’s a difficult conversation to have but it’s important to relate your plans directly so that your family knows your decisions. Further, you’ll want to be sure they are aware of the cost of the executor so it isn’t the surprise it was in Stephanie’s case (in fact, you yourself may want to be sure you are aware of the costs, too).

You can learn more about Probate and Estate Administration on the Probate Practice Center on our website. While you’re there, be sure to sign up for our free monthly e-newsletter to stay informed about issues affecting you, your family and your estate.

 

Reference: Reuters (June 16, 2011) “Help! Our executor cost us $129,000”

 

ESTATE PLANNING / CHARITABLE GIVING

From Recordonline.com of the Times Herald-Record (May 8, 2011) “Trust Options for Leaving Assets to Charity”

 "Although most clients want to pass on their assets to family and friends, some also want to donate to charities. The charitable remainder trust (CRT) allows donations to your favorite charity and, in the process, reaps tax benefits for you as the donor to the charity."

The idea of giving to charity would seem to be a simple, but the simple methods aren’t always the best ones. Sometimes a bit of financial finesse can go a long way, helping both your charity of choice and your own finances. I refer to that as “doing well by doing good.”

If you want to be a tax-savvy philanthropist, consider using a time-honored strategy known as a “charitable remainder trust” (CRT). The Times-Herald Record recently offered a crash course in their article, “Protecting Your Future: Trust option for leaving assets to charity.”

A CRT allows you to give assets to charity in a tax-savvy manner that may even provide an income stream that helps both you and your charity. When the CRT is established, the assets you’ve chosen to donate are transferred to the trust. The charity you’ve chosen is the trustee, and manages the assets. They may pay you and/or your beneficiaries a portion of the income generated by the trust either for a certain number of years, or your entire life. At the end of the term, depending on the type of payout you’ve chosen, the charity receives the remainder of the principal in the trust.

This strategy works best when the underlying assets are highly appreciated, and by donating them to charity you can avoid a significant capital gains tax.

Of course, your family members may not be too happy to see those assets going to charity – so you may want to consider replacing their value for your heirs with life insurance.

 You can learn more about charitable trusts in the Charitable Planning Practice Center on our website, and in the September 2010 issue of our estate planning newsletters, “Charitable Opportunities.”

Link: http://www.recordonline.com/apps/pbcs.dll/article?AID=/20110508/BIZ/105080322

 

ESTATE PLANNING / LIFE INSURANCE

 From SmartMoney (April 20, 2011) “How to Avoid Taxes on Life Insurance”

 Having enough life and disability insurance should be a key element of your personal financial game plan. Hopefully, with some advance planning, you can collect life and disability insurance proceeds free of taxes.

 

Since most of just finished filing our annual income tax return, we may not be in the mood to further discuss the topic of taxes … unless it’s all about avoiding them. Which is why now is a good time to turn to the topic of life insurance, taxes and your estate plan.

The primary purpose of life insurance, for most people, is to replace income that would be lost should you die prematurely. The good news is that life insurance death benefits are generally received by your beneficiaries free of any federal income tax (and usually free of any state income tax as well).

But what about the federal estate tax? Contrary to popular belief, the death benefit of life insurance could be subject to estate tax. If the tax rules treat you as the owner of a policy on your own life, the death benefit is included in your taxable estate – unless the money goes to your surviving spouse (they then will become part of his or her estate). If you are the owner of the policy and the death benefits go to anyone else, a child or sibling even, then money is included in your estate.

The estate tax exemption is currently set at $5 million through 2012, and although this is historically quite high, a large life insurance policy could push an otherwise non-taxable estate above the limit. And don’t forget that the current rule is in place only through 2012, and there are quite a few who believe lowering the exemption might be the answer to reducing our federal debt.

Smart Money last week laid out pretty clearly how the life insurance / estate tax scenario plays out. To quote them: “The tax rules say you own a life insurance policy if you possess so-called ‘incidents of ownership.’ You have them if you retain the power to change policy beneficiaries, change coverage amounts, cancel the policy and so forth.”

So, how do you avoid these “incidents of ownership”? You can establish an irrevocable life insurance trust (ILIT) to purchase a new policy on your life. If that’s not possible, you could consider transferring an existing policy. But there are some potential land mines in that strategy. First, if you transfer the policy and die within three years, the IRS pulls the proceeds back into your estate as if the transfer had not occurred. Second, if you transfer a policy with cash value in excess of $13,000, it could trigger adverse gift tax consequences.

You can read more about irrevocable life insurance trusts in the Fundamental Estate Planning Practice Center on our website. While you’re there, be sure to sign up for our free estate planning e-newsletter to stay informed of important matters affecting your estate plan.

Link: http://www.smartmoney.com/personal-finance/insurance/how-to-avoid-taxes-on-life-and-disability-insurance-1303243651375/

 

 

Are Retirement Accounts Exempt from Creditor Claims?

     Most people are aware that a retirement account is exempt from the claims of the participant’s creditors.  A recent case examined the issue of whether this same exemption from creditor claims applies to the beneficiary of the retirement account.

            This recent case addressed the situation where a father named his son as the beneficiary of his retirement account.  Upon father’s death, the son elected to transfer the funds into an “inherited IRA”.  Under the terms of the inherited IRA, son was required to take annual minimum distributions.  He was also permitted to take additional payments at his discretion, without penalty.

            Shortly after inheriting the IRA, a creditor obtained a large judgment against the son.  When the judgment was not paid, the creditor attempted to garnish the funds in the son’s inherited IRA.  Son objected, arguing that the inherited IRA account was not subject to the claims of his creditors.

            There is little question that, under Florida law, an IRA account would not be subject to claims by the father’s creditors.  This reflects a clear legislative policy to protect retirement funds accumulated for retirement by a participant.  At issue was whether the same creditor protection extends to the beneficiary of a retirement account. 

            In the recent case referred to above, the Court found that inherited IRA’s are not vehicles to preserve money for a participant’s retirement.  Instead inherited IRA’s are liquid assets that a beneficiary may access at any time without penalty and without regard to retirement needs. As such, the legislative protection afforded to participants in a retirement account does not extend to the beneficiaries of an inherited retirement account.

            This case has significant implications for anyone who has accumulated a substantial amount of funds in a retirement account.  It clearly indicates that the naming of individuals as beneficiaries of the account, such as a beneficiary designation which states “my children in equal shares” or the equivalent, will not provide creditor protection against the child’s creditors.

            A far wiser course of action would be to provide that each child’s share of the retirement assets should be paid into a trust for the benefit of that child.  The terms of the trust could then provide for creditor protection against each child’s creditors.  It should be pointed out that there are a number of complicated rules which apply to the designation of a trust as the beneficiary of a retirement account.  It is highly recommended that one obtain professional advice before naming a trust as the beneficiary of a retirement account.