How Does the SECURE Act Change Your Estate Plan?

The SECURE Act has made big changes to how IRA distributions occur after death. Anyone who owns an IRA, regardless of its size, needs to examine their retirement savings plan and their estate plan to see how these changes will have an impact. The article “SECURE Act New IRA Rules: Change Your Estate Plan” from Forbes explains what the changes are and the steps that need be taken.

Some of the changes include revising wills and trusts which include provisions creating conduit trusts that had been created to hold IRAs and preserve the stretch IRA benefit, while the IRA plan owner was still alive.

Existing conduit trusts may need to be modified before the owner’s death to address how the SECURE Act might undermine the intent of the trust.

Rethinking and possibly completely restructuring the planning for the IRA account may need to occur. This may mean making a charity the beneficiary of the account, and possibly using life insurance or other planning strategies to create a replacement for the value of the charitable donation.

Another alternative may be to pay the IRA balance to a Charitable Remainder Trust (CRT) on death that will stretch out the distributions to the beneficiary of the CRT over that beneficiary’s lifetime under the CRT rules. Paired with a life insurance trust, this might replace the assets that will ultimately pass to the charity under the CRT rules.

The biggest change in the SECURE Act being examined by estate planning and tax planning attorneys is the loss of the “stretch” IRA for beneficiaries inheriting IRAs after 2019. Most beneficiaries who inherit an IRA after 2019 will be required to completely withdraw all plan assets within ten years of the date of death.

One result of the change of this law will be to generate tax revenues. In the past, the ability to stretch an IRA out over many years, even decades, allowed families to pass wealth across generations with minimal taxes, while the IRAs continued to grow tax tree.

Another interesting change: No withdrawals need be made during that ten-year period, if that is the beneficiary’s wish. However, at the ten-year mark, ALL assets must be withdrawn, and taxes paid.

Under the prior law, the period in which the IRA assets needed to be distributed was based on whether the plan owner died before or after the RMD and the age of the beneficiary.

The deferral of withdrawals and income tax benefits encouraged many IRA owners to bequeath a large IRA balance completely to their heirs. Others, with larger IRAs, used a conduit trust to flow the RMDs to the beneficiary and protect the balance of the plan.

There are exceptions to the 10-year SECURE Act payout rule. Certain “eligible designated beneficiaries” are not required to follow the ten-year rule. They include the surviving spouse, chronically ill heirs and disabled heirs. Minor children are also considered eligible beneficiaries, but when they become legal adults, the ten year distribution rule applies to them. Therefore, by age 28 (ten years after attaining legal majority), they must take all assets from the IRA and pay the taxes as applicable.

The new law and its ramifications are under intense scrutiny by members of the estate planning and elder law bar because of these and other changes. Speak with your estate planning attorney to review your estate plan to ensure that your goals will be achieved in light of these changes.

Reference: Forbes (Dec. 25, 2019) “SECURE Act New IRA Rules: Change Your Estate Plan”

Start the New Year with Estate Planning To-Do’s

Families who wish their loved ones had not created an estate plan are far and few between. However, the number of families who have had to experience extra pain, unnecessary expenses and even family battles because of a lack of estate planning are many. While there are a number of aspects to an estate plan that take some time to accomplish, The Daily Sentinel recommends that readers tackle these tasks in the article “Consider These Items As Part of Your Year-End Plan.”

Review and update any beneficiary designations. This is one of the simplest parts of any estate plan to fix. Most people think that what’s in their will controls how all of their assets are distributed, but this is not true. Accounts with beneficiary designations—like life insurance policies, retirement accounts, and some bank accounts—are controlled by the beneficiary designation and not the will.

Proceeds from these assets are based on the instructions you have given to the institution, and not what your will or a trust directs. This is also true for real estate that is held in JTWROS (Joint Tenancy with Right of Survivorship) and any real property transferred through the use of a beneficiary deed. The start of a new year is the time to make sure that any assets with a beneficiary designation are aligned with your estate plan.

Take some time to speak with the people you have named as your agent, personal representative or successor trustee. These people will be managing all or a portion of your estate. Make sure they remember that they agreed to take on this responsibility. Make sure they have a copy of any relevant documents and ask if they have any questions.

Locate your original estate planning documents. When was the last time they were reviewed? New laws, and most recently the SECURE Act, may require a revision of many wills, especially if you own a large IRA. You’ll also want to let your executor know where your original will can be found. The probate court, which will review your will, prefers an original. A will can be probated without the original, but there will be more costs involved and it may require a few additional steps. Your will should be kept in a secure, fire and water-safe location. If you keep copies at home, make a note on the document as to where the original can be found.

Create an inventory of your online accounts and login data for each one. Most people open a new account practically every month, so keep track. That should include email, personal photos, social media and any financial accounts. This information also needs to be stored in a safe place. Your estate planning document file would be the logical place for this information but remember to update it when changing any information, like your password.

If you have a medical power of attorney and advance directive, ask your primary care physician if they have a means of keeping these documents, and explain how you wish the instructions on the documents to be carried out. If you don’t have these documents, make them part of your estate plan review process.

A cover letter to your executor and family that contains complete contact information for the various professionals—legal, financial, and medical—will be a help in the case of an unexpected event.

Remember that life is always changing, and the same estate plan that worked so well ten years ago, may be out of date now. Speak with an experienced estate planning attorney in your state who can help you create a plan to protect yourself and your loved ones.

Reference: The Daily Sentinel (Dec. 28, 2019) “Consider These Items As Part of Your Year-End Plan”

Retirement and Estate Planning Work Better Together

So, you’ve been married for a while, and you’re both comfortable with which bank accounts, credit cards and investment accounts are shared and which other accounts are kept separate. However, where the big picture is concerned—like coordinating retirement plans, health coverage and tax planning—you both need to take an active role in planning and making good decisions. In fact, says the article “Couples and Money: When Together is Better” from Kiplinger, the decisions that work well for you as individuals may not be so hot, when they are looked at from a couple’s perspective.

Here’s an example. A man is working at a firm that doesn’t offer a match for his 401(k) contributions, but his wife’s employer does. Instead of contributing to his 401(k) plan, he uses the money to pay off a HELOC (Home Equity Line of Credit) that the couple had taken together to do some upgrades on their home. She contributes enough to her own 401(k) to get her company’s match every year. The goal is to cut their debt and save as much as possible. This worked at that time in the couple’s life.

Ten years later, they are both maxing out their 401(k) savings and working to build short-term savings to send kids to college through the use of 529 College Savings Accounts.

Retirement accounts can never be jointly owned. However, some couples fall into a trap of saving for themselves without considering the overall household. Dual earning couples often run into trouble, when one has a workplace plan and the other does not. The spouse with the workplace plan isn’t thinking that he or she needs to save enough for two people to retire. With two incomes, you might think that both are making retirement a savings priority, but without a 401(k) plan, it’s possible that only one person is saving and only saving enough for themselves.

A general recommendation is that both members of a couple save between 10-15% of their household earnings, rather than their personal earnings, in retirement accounts. Couples should review their respective retirement plans together and plan together. If one has a more generous match, access to a Roth option, or better investment opportunities, they should consider how much the person with the better plan should save.

Couples also need to examine other financial aspects of their lives. Coordinating retirement benefits, reviewing life insurance policies, planning a coordinated strategy for taking Social Security and making informed choices about health care coverage can make a big difference in the family’s financial well-being.

Equally important: making sure that an estate plan is in place. That includes a will that names a guardian for any minor children, a health care proxy and a financial power of attorney. Depending upon the family’s circumstances, that may include trusts or other wealth transfer strategies.

Reference: Kiplinger (Dec. 23, 2019) “Couples and Money: When Together is Better”

Life Insurance Is a Good Estate Planning Tool but Needs to Be Done Carefully

With proper planning and the help of a seasoned estate planning or probate attorney, insurance money can pay expenses, like estate tax and avoid the need to liquidate other assets, says FEDweek’s recent article entitled “Errors to Avoid in Using Life Insurance for Estate Planning.”

As an example, let’s say that Reggie passes away and leaves a large estate to his daughter Veronica. There’s a big estate tax that’s due. However, the majority of Reggie’s assets are tied up in real estate and an IRA. In light of this, Veronica might not want to proceed directly into a forced sale of the real estate. However, if she taps the inherited IRA to raise cash, she’ll be required to pay income tax on the withdrawal and forfeit a very worthwhile opportunity for extended tax deferral.

If Reggie plans ahead, he could purchase insurance on his own life. The proceeds could be used to pay the estate tax bill. As a result, Veronica can retain the real estate, while taking only minimum required distributions (RMDs) from the inherited IRA.

If the insurance policy is owned by Veronica or by a trust, the proceeds probably won’t be included in Reggie’s estate and won’t increase her estate taxes.

Along these same lines, here are some common life insurance errors to avoid:

Designating your estate as beneficiary. When you make this move, it puts the insurance policy proceeds into your estate, exposing it to estate tax and your creditors. Your executor will also have to deal with more paperwork, if your estate is the beneficiary. Instead, name the appropriate people or charities.

Designating just a single beneficiary. You should name at least two “backup” beneficiaries. This will decrease any confusion, if the primary beneficiary predeceases you.

Throwing the copy of your life insurance policy in the “file and forget” drawer. You should review your policies at least once every few years. If the beneficiary is an ex-spouse or someone who’s passed away, make the appropriate changes and get a confirmation from the insurance company in writing.

Failing to carry adequate insurance. If you have a youngster, it undoubtedly requires hundreds of thousands of dollars to pay all her expenses, such as college bills, in the event of your untimely death.

Talk to a qualified and experienced estate planning attorney about the particulars of your situation.

Reference: FEDweek (Dec. 12, 2019) “Errors to Avoid in Using Life Insurance for Estate Planning”

How Should I Prepare for My Child’s Future?

It’s been a common path for millennials and their predecessors to go to a four-year college and get a job. If they were short on funds, they’d take out some loans. However, there have been some signals that this norm is changing.

With worries about a student debt crisis and with the experience of recent graduates, new college-age students are increasingly turning to alternatives to the established route to create their own debt-free future.

Kiplinger’s recent article entitled “How to Stay Flexible in Saving for Your Child’s Future” says that student debt is leading to obstacles, when it comes to achieving major milestones of financial freedom. Of the young millennials surveyed, nearly half (47%) said they delayed purchasing a home because of  their debt, 40% delayed saving for retirement and 31% waited to move out of their parents’ home. A total of 28% of parents said they delayed saving for their own retirement, to pay for their children’s education.

Saving for a child’s future now looks different than when these 18-year-olds were born.  It certainly will be the case, when they leave the nest. As a result, it’s critical for parents to try to give them help, by learning how to adapt to the changing times.

With the gig economy and digitally enabled side jobs, parents have more flexibility to maintain their financial goals, while preserving their personal lives.

When considering flexibility, especially when saving for a child’s education, it’s actually one of the big benefits of a 529 plan. Although you’re responsible if you make a withdrawal that isn’t for a qualified education expense, the penalties aren’t too steep. Federal income tax is imposed on the plan’s growth, plus a 10% penalty on the growth. Therefore, depending on the amount withdrawn, the penalty may be very little.

Nonetheless, the tax penalties may worry parents enough that even when their goal is to save for their child’s education, they want to spread their savings into multiple accounts. This has some clear advantages, when the child decides not to go to college after high school. The good news is that there are plenty of options to account for both possibilities.

  • Other investment accounts: You could also create a brokerage account with money earmarked for a child. This gives parents complete flexibility in how the money is used. The money can be used for expenses other than education, but the downside is not having the tax benefits of the 529 plan (tax deferral and potential tax-free growth).
  • Trusts: a trust allows parents to keep complete control over the funds and lets parents provide instructions to the trustee, on how the trust can be used.
  • Custodial accounts: These accounts are managed by a guardian (or custodian), until the child is an adult. These accounts are pretty easy to set up but don’t have the restrictions that can be placed on trust funds.

The digital world has changed everything, including how we plan for our children and their future. Be flexible and make your plans accordingly.

Reference: Kiplinger (Dec. 27, 2019) “How to Stay Flexible in Saving for Your Child’s Future”

What Should I Know About Being an Executor?

You’re named executor because someone thinks you’d be good at collecting assets, settling debts, filing estate tax returns where necessary, distributing assets and closing the estate.

However, Investopedia’s article from last summer, “5 Surprising Hazards of Being an Executor,” explains that the person named as an executor isn’t required to accept the appointment. Prior to agreeing to act as an executor, you should know some of the hazards that can result, as well as how you can address some of these potential issues, so that being an executor can run smoothly.

  1. Conflicts with Co-Executors. Parents will frequently name more than one adult child as co-executor, so they don’t show favoritism. However, for those who are named, this may not work well because some children may live far way, making it difficult to coordinate the hands-on activities, like securing assets and selling a home. Some adult children may also not have the financial ability to deal with creditors, understand estate tax matters and perform effective accounting to satisfy beneficiaries that things have been properly handled. In addition, multiple executors mean additional paperwork. Instead, see if co-executors can agree to allow only one to serve, and the others will waive their appointment. Another option is for all of the children to decline and allow a bank’s trust department to handle the task. Employing a bank to serve instead of an individual as executor can alleviate conflicts among the children and relieves them from what could be a very difficult job.
  2. Conflicts with Heirs. It’s an executor’s job to gather the estate assets and distribute them according to the deceased person’s wishes. In some cases, heirs will land on a decedent’s home even before the funeral, taking mementos, heirlooms and other valuables. It’s best to secure the home and other assets as quickly as possible. Tell the heirs that this is the law and share information about the decedent’s wishes, which may be described in a will or listed in a separate document. This Letter of Last Instruction isn’t binding on the executor but can be a good guide for asset disbursements.
  3. Time-Consuming Responsibilities. One of the major drawbacks to be an executor is the amount of time it takes to handle responsibilities. For example, imagine the time involved in contacting various government agencies. This can include the Social Security Administration to stop Social Security benefits and, in the case of a surviving spouse, claim the $255 death benefit. However, an executor can permit an estate attorney to handle many of these matters.
  4. Personal Liability Exposure. The executor must pay taxes owed, before disbursing inheritances to heirs. However, if you pay heirs first and don’t have enough funds in the estate’s checking account to pay taxes, you’re personally liable for the taxes. Explain to heirs who are chomping at the bit to receive their inheritances that you’re not allowed to give them their share, until you’ve settled with creditors, the IRS and others with a claim against the estate. You should also be sure that you understand the extent of the funds needed to pay what’s owed.
  5. Out-of-Pocket Expenses. An executor can receive a commission for handling his duties. The amount of the commission is typically determined by the size of the estate (e.g., a percentage of assets). However, with many cases, particularly smaller estates and among families, an executor may waive any commission. You should pay the expenses of the estate from an estate checking account and record all out-of-pocket expenses, because some of these expenses may be reimbursable by the estate.

Being an executor can be a challenge, but somebody must do it. If that person’s you, be sure to know what you’re getting into before you agree to act as an executor.

Reference: Investopedia (June 25, 2019) “5 Surprising Hazards of Being an Executor”

Key Health Document Most Americans Don’t Have but Should

You may not like the idea of contemplating your own mortality, or that of a loved one. You may procrastinate all year long about putting your final wishes in place. However, this one document is important for yourself, your loved ones and your life. You shouldn’t put it off any longer. Forbes’ recent article titled “Two-Thirds of All Americans Are Missing This Estate Planning Document” explains why.

A health care directive is a legal document that an individual will use to give specific directions for caregivers, in case of dementia or illness. It directs end of life decisions. It also gives directions for how the person wishes their body to be cared for after their death.

This document is known by several different names: living wills, durable health care powers of attorney or medical directives. However, the purpose is the same: to give guidance and direction on making medical and end-of-life decisions.

This document itself is a relatively new one. The first was created in California in 1976, and by 1992, all fifty states had similar laws. The fact that the law was accepted so fast across the country, indicates how important it is. The document provides control when a person is impaired and after their death. That is at the heart of all estate planning.

Yet just as so many Americans don’t have wills, only a third have a health care directive. That’s a surprise, since both estate planning attorneys and health care professionals regularly encourage people to have these documents in place.

A key part of a health care directive is selecting an agent. This is a person who will act as the proxy to make decisions for another person, consistent with their wishes. They will also have to advocate for the person with respect to having treatment continue or shifting to pain management and palliative care. The spouse is often the first choice for this role. An adult child or other close and trusted family or friends can also serve.

The agent’s role does not end at death but continues to ensure that post-mortem wishes are carried out. The agent takes control of the person’s body, making sure that any organ donations are made, if it was the person’s wish.

Once any donation wishes are carried out, the agent also makes sure that funeral wishes are done according to the person’s wishes. Burial is an ancient tradition, but there are many different choices to be made. The health care directive can have as many details as possible, or simply state burial or cremation.

Having a health care directive in place permits an individual to state his or her wishes clearly. Talk with your estate planning attorney about creating a health care directive as part of your comprehensive estate plan.

Reference: Forbes (December 13, 2019) “Two-Thirds of All Americans Are Missing This Estate Planning Document”

Making a Fresh Start for 2020? Here’s Help

Some people like to start their New Year’s off with a clean slate, going through the past year’s files and tossing or shredding anything they don’t absolutely need. However, many don’t, in part because we’re not sure exactly what documents we need to keep, and which we can toss. This article from AARP Magazine provides the missing information so you can get started: “When to Keep, Shred or Scan Important Papers.”

Tax Returns. Unless you’re planning on running for office, the last three years of tax returns and supporting documents are enough. That’s the window the IRS has to audit taxpayers. But there are some exceptions: if you are self-employed or have a complex return, double that number to six years, which is how much time the IRS has to audit you, if it suspects something’s fishy.

Regardless of how you earn your income, visit MySocialSecurity.gov account before shredding to make sure that your income is being accurately recorded. Having your tax records in hand will make it easier to get any figures fixed.

As for documents regarding home ownership, keep records related until you sell the house. You can use home-improvement receipts to possibly reduce taxes at that time.

Banking and Investments. If you or your spouse might be applying for Medicaid to pay nursing home costs, you’ll need to have five years of financial records. That includes bank statements, credit card statements, and statements from brokerage or financial advisors. This is so the government can look for any asset transfers that might delay eligibility.

If that’s not the case, then you only need banking and financial statements for a year, except for those issued for income-related purposes to provide the IRS with a record of tax-related transactions. Your bank or credit card issuer may have online statements going back several years online. However, if not, download statements and save them in a password protected folder on your home computer.

Stocks and bonds purchases need to be kept for six years after filing the return reporting the sale of the security. Again, this is for the IRS.

If you have a stack of cancelled checks, shred them. Most every bank and credit union today have an electronic version of your checks.

Medical Records. These are the records you want to keep indefinitely, especially if you have had a serious illness or injury. The information may make a difference in how your physicians treat you in the future, so normal or not, hang on to the following documents: surgical reports, hospital discharge summaries and treatment plans for major illnesses. Put these in a password-protected folder in your computer or a secure cloud-based account, so they can be shared with future healthcare providers. You should also keep immunization and vaccination records. The goal is to have your own medical records and not to rely on your doctor’s office for these documents.

Maintain proof of payments to medical providers for six years, with the relevant tax return, in case the IRS questions a health care deduction.

Reference: AARP Magazine (August 5, 2019) “When to Keep, Shred or Scan Important Papers”

How Business Owners Undo Their Years of Hard Work

When it comes to preparing for retirement, transitioning their business and putting a succession plan in place, many small business owners simply aren’t realistic, says the article “Business Owners Dream (Wrongly) of an Easy Retirement Transition” from Plan Advisor. While it’s great that they believe in their businesses, by putting every last dollar they have into the business, thinking they will reap the rewards when it’s time to sell, they put themselves in a risky position.

Many small business owners treat their business as their nest egg. That may not be wrong, but if there is no other estate planning or retirement planning, there are a number of ways this could go wrong.

For one thing, it’s not likely that the value of the business at the time of the sale can be guaranteed. What if the value of the business is not as strong as the owner thinks it is? It’s better to have more than a few eggs in a retirement basket, including savings in retirement accounts that provide tax advantages.

The business owner can open a 401(k), SEP-IRA, SIMPLE or a pension plan. Because these types of accounts are tax deferred, the investments can grow while avoiding taxation. The best retirement plan for any small business owner depends upon how much income the business generates, how stable earnings are, how many employees there are and how generous the business owner wishes to be with the full-time employees.

This last factor matters because the law requires most tax-deferred plans to be fair to all employees. A business owner cannot open a 401(k) for themselves and exclude full-time employees. However, the appreciation of employees for having a 401(k) plan should be considered. By investing in an employee retirement plan, and perhaps a matching program, the business becomes more attractive to current and future employees.

Estate planning is a critical piece of the succession plan. A true family legacy plan needs to go beyond defining who will be in charge of the business and estate if the owner dies, and how the business and any other assets will be divided. If there is no will, the state’s laws will govern how assets are divided.

An estate planning attorney who routinely works with business owners will be able to help with the formation of a succession plan, with an eye to fulfilling the owner’s goals for themselves and their family. It should be understood that any succession plan needs to work in conjunction with the overall estate plan, so that both can achieve their respective goals.

For a succession plan to work, it needs to be put into place five to ten years in advance. If a sale of the business is at the heart of the plan, it can take five years to value the businesses’ profitability, formalize the management structure, identify a solid buyer, determine how the transition will be made, etc.

Reference: Plan Advisor (December 12, 2019) “Business Owners Dream (Wrongly) of an Easy Retirement Transition”

From Gentle Persuasion to a No-Nonsense Approach, Talking About Estate Plans

Sometimes the first attempt is a flop. Imaging this exchange: “So, do you want to talk about what happens when you die?” Answer: “Nope.” That’s what can happen, but it doesn’t have to, says The Wall Street Journal’s recent article “Readers Offer Their Advice on Talking to Aging Parents About Estate Plans.”

Many people have successfully begun this conversation with their aging parents. The gentle persuasion method is deemed to be the most successful. Treating elderly parents as adults, which they are, and asking about their fears and concerns is one way to start. Educating, not lecturing, is a respectful way to move the conversation forward.

Instead of asking a series of rapid-fire questions, provide information. One family assembled a notebook with articles about how to find an estate planning attorney, when people might need a trust, or why naming someone as power of attorney is so important.

Others begin by first talking about less important matters than bank accounts and bequests. Asking a parent for a list of utility companies with the account number, phone number and if they are paying bills online, their password, is an easy entry to thinking about next steps. Sometimes a gentle nudge, is all it takes to unlock the doors.

For some families, a more direct, less gentle approach gets the job done. That includes being willing to tell parents that not having an estate plan or not being willing to talk about their estate plan is going to lead to disaster for everyone. Warn them about taxes or remind them that the state will disburse all of their hard-earned assets, if they don’t have a plan in place.

One son tapped into his father’s strong dislike of paying taxes. He asked a tax attorney to figure out how much the family would have to pay in estate taxes, if there were no estate plan in place. It was an eye-opener, and the father became immediately receptive to sitting down with an estate planning attorney.

A daughter had tried repeatedly to get her father to speak with an estate planning attorney. His response was the same for several decades: he didn’t believe that his estate was big enough to warrant doing any kind of planning. One evening the daughter simply threw up her hands in frustration and told him, “Fine, if your favorite charity is the federal government, do nothing…but if you’d rather benefit the church or a university, do something and make your desires known.”

For months after seeing an estate attorney and putting a plan in place, he repeated the same phrase to her: “I had no idea we were worth so much.”

Between the extremes is a third option: letting someone else handle the conversation. Aging parents may be more receptive to listening to a trusted individual, who is of their same generation. One adult daughter contacted her wealthy mother’s estate planning attorney and financial advisor. The mother would not listen to the daughter, but she did listen to her estate planning attorney and her financial advisor, when they both reminded her that her estate plan had not been reviewed in years.

Reference: The Wall Street Journal (December 16, 2019) “Readers Offer Their Advice on Talking to Aging Parents About Estate Plans”

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