What Should I Know about Beneficiary Designations?

A designated beneficiary is named on a life insurance policy or some type of investment account as the individual(s) who will receive those assets, in the event of the account holder’s death. The beneficiary designation doesn’t replace a signed will but takes precedence over any instructions about these accounts in a will. If the decedent doesn’t have a will, the beneficiary may see a long delay in the probate court.

If you’ve done your estate planning, most likely you’ve spent a fair amount of time on the creation of your will. You’ve discussed the terms with an established estate planning attorney and reviewed the document before signing it.

FEDweek’s recent article entitled “Customizing Your Beneficiary Designations” points out, however, that with your IRA, you probably spent far less time planning for its ultimate disposition.

The bank, brokerage firm, or mutual fund company that acts as custodian undoubtedly has a standard beneficiary designation form. It is likely that you took only a moment or two to write in the name of your spouse or the names of your children.

A beneficiary designation on account, like an IRA, gives instructions on how your assets will be distributed upon your death.

If you have only a tiny sum in your IRA, a cursory treatment might make sense. Therefore, you could consider preparing the customized beneficiary designation form from the bank or company.

For more customization, you can have a form prepared by an estate planning attorney familiar with retirement plans.

You can address various possibilities with this form, such as the scenario where your beneficiary predeceases you, or she becomes incompetent. Another circumstance to address, is if you and your beneficiary die in the same accident.

These situations aren’t fun to think about but they’re the issues usually covered in a will. Therefore, they should be addressed, if a sizeable IRA is at stake.

After this form has been drafted to your liking, deliver at least two copies to your custodian. Request that one be signed and dated by an official at the firm and returned to you. The other copy can be kept by the custodian.

Reference: FEDweek (Dec. 26, 2019) “Customizing Your Beneficiary Designations”

Fixing an Estate Plan Mistake

When an issue arises, you need to seek the assistance of a qualified and experienced estate planning attorney, who knows to fix the problems or find the strategy moving forward.

For example, an irrevocable trust can’t be revoked. However, in some circumstances it can be modified. The trust may have been drafted to allow its trustees and beneficiaries the authority to make certain changes in specific circumstances, like a change in the tax law.

Those kinds of changes usually require the signatures from all trustees and beneficiaries, explains The Wilmington Business Journal’s recent article entitled “Repairing Estate Planning Mistakes: There Are Ways To Clean Up A Mess.”

Another change to an irrevocable trust may be contemplated, if the trust’s purpose may have become outdated or its administration is too expensive. An estate planning attorney can petition a judge to modify the trust in these circumstances when the trust’s purposes can’t be achieved without the requested change. Remember that trusts are complex, and you really need the advice of an experienced trust attorney.

Another option is to create the trust to allow for a “trust protector.” This is a third party who’s appointed by the trustees, the beneficiaries, or a judge. The trust protector can decide if the proposed change to the trust is warranted. However, this is only available if the original trust was written to specify the trust protector.

A term can also be added to the trust to provide “power of appointment” to trustees or beneficiaries. This makes it easier to change the trust for the benefit of current or future beneficiaries.

There’s also decanting, in which the assets of an existing trust are “poured” into a new trust with different terms. This can include extending the trust’s life, changing trustees, fixing errors or ambiguities in the original language, and changing the legal jurisdiction. State trust laws vary, and some allow much more flexibility in how trusts are structured and administered.

The most drastic option is to end the trust. The assets would be distributed to the beneficiaries, and the trust would be dissolved. Approval must be obtained from all trustees and all beneficiaries. A frequent reason for “premature termination” is that a trust’s assets have diminished in value to the extent that administering it isn’t feasible or economical.

Again, be sure your estate plan is in solid shape from the start. Anticipating problems with the help of your lawyer, instead of trying to solve issues later is the best plan.

Reference: Wilmington Business Journal (Jan. 3, 2020) “Repairing Estate Planning Mistakes: There Are Ways To Clean Up A Mess”

When Do I Need an Elder Law Attorney?

Elder law is different from estate law, but they frequently address many of the same issues. Estate planning contemplates your finances and property to best provide for you and your family while you’re still alive but incapacitated. It also concerns itself with the estate you leave to your loved ones when you die, minimizing probate complications and potential estate tax bills. Elder law contemplates these same issues but also the scenario when you may need some form of long-term care, even your eligibility for Medicaid should you need it.

A recent article from The Balance’s asks “Do You or a Family Member Need to Hire an Elder Law Attorney?” According to the article there are a variety of options to adjust as economically and efficiently as possible to plan for all eventualities. An elder law attorney can discuss these options with you.

Medicaid is a complicated subject, and really requires the assistance of an expert. The program has rigid eligibility guidelines in the event you require long-term care. The program’s benefits are income- and asset-based. However, you can’t simply give everything away to qualify, if you think you might need this type of care in the near future. There are strategies that should be implemented because the “spend down” rules and five-year “look back” period reverts assets or money to your ownership for qualifying purposes, if you try to transfer them to others. An elder law attorney will know these rules well and can guide you.

You’ll need the help and advice of an experienced elder law attorney to assist with your future plans, if one or more of these situations apply to you:

  • You’re in a second (or later) marriage;
  • You’re recently divorced;
  • You’ve recently lost a spouse or another family member;
  • Your spouse is incapacitated and requires long-term care;
  • You own one or more businesses;
  • You have real estate in more than one state;
  • You have a disabled family member;
  • You’re disabled;
  • You have minor children or an adult “problem” child;
  • You don’t have children;
  • You’d like to give a portion of your estate to charity;
  • You have significant assets in 401(k)s and/or IRAs; or
  • You have a taxable estate for estate tax purposes.

If you have any of these situations, you should seek the help of an elder law attorney.

If you fail to do so, you’ll most likely give a sizeable percentage of your estate to the state, an ex-spouse, or the IRS.

State probate laws are very detailed as to what can and can’t be included in a will, trust, advance medical directive, or financial power of attorney. These laws control who can and can’t serve as a personal representative, trustee, health care surrogate, or attorney-in-fact under a power of attorney.

Hiring an experienced elder law attorney can help you and your family avoid simple but expensive mistakes, if you or your family attempt this on your own.

Reference: The Balance (Jan. 21, 2020) “Do You or a Family Member Need to Hire an Elder Law Attorney?”

Should I Purchase Long-Term Care Insurance?

According to Covering Katy’s recent article entitled “How to Protect Yourself From Long-term Care Cost,” to answer the question of long-term care, think about two variables: your likelihood of needing long-term care and the cost of the care.

Government statistics show that a person who’s 65 today has nearly a 70% chance of eventually needing some kind of long-term care. The average cost for a private room in a nursing home is about $100,000 per year, and a home health aide costs about $50,000 per year. When you do the math, your chances of needing long-term care are good and it’s expensive. If you needed several years of long-term care, it could seriously deplete your savings.

Since Medicare typically pays only a small part of long-term care costs, you should consider the following options for meeting these expenses:

You could “self-insure” against long-term care expenses, by setting aside some of your investment portfolio for this. However, it looks like you’d have to save a lot of money before you felt you were truly protected. This could be especially tough with the need to save and invest for the other expenses associated with retirement.

When you buy long-term care insurance, you’re moving the risk of paying for long-term care from yourself to an insurance carrier. Some LTC policies pay costs for a set number of years, while others cover you for life. Shop around for a policy that offers the combination of features you think best meet your needs. Long-term care gets more expensive as you get older. Therefore, if you’re interested in this type of coverage, don’t delay in your search.

A “hybrid” policy, like life insurance with a long-term care/chronic illness rider, combines long-term care benefits with those offered by a traditional life insurance policy. As a result, if you were to purchase a hybrid policy, and you never needed long-term care, your policy would pay a death benefit to your beneficiary. Conversely, if you ever do require long-term care, your policy will pay benefits for those expenses. The amount of money available for LTC can exceed the death benefit dramatically. There are quite a few different types of hybrid policies, so do your research before choosing a policy.

While you may decide you’re willing to take the chance of never requiring any type of long-term care, if you think that’s a risk you’d rather not take, look into all your coverage options thoroughly.

Reference: Covering Katy (Jan. 13, 2020) “How to Protect Yourself From Long-term Care Costs”

The SECURE Act and Your Retirement

For anyone who has saved a high six- or seven-figure balance in their retirement accounts, the SECURE Act will definitely affect their retirement plans. That includes 401(k)s, 403(b)s, and other workplace plans, as well as traditional IRAs and Roth IRA accounts. The article “How the new Secure Act affects your retirement” from the Daily Camera provides a clear picture of the changes.

Stretch IRAs are Curtailed. Anyone who inherited an IRA (traditional or Roth) from a parent before 2020, may take Required Minimum Distributions (RMDs) from those accounts over their own life expectancy. Let’s say a parent died when you were 48—you could stretch those distributions out over the course of 36 years. This option gave heirs the ability to spread income and the taxes that come with the income out over decades—with little distributions having little impact on taxes. If you inherited a Roth IRA, you could benefit from its tax-free growth over your entire lifetime.

All that’s changed now. A non-spousal heir (or one who is disabled, chronically ill or a minor child) now has ten years in which to take their distributions. They have to pay ordinary income taxes on the amount they take out, over a far shorter period of time. Newly inherited Roth IRAs have the same rules, but usually there are no taxes due. If a minor inherits an IRA, once they reach the age of majority, they have ten years in which to take their distributions.

A Small Break for Required IRA Distributions. Until the SECURE Act, retirees had to start taking their RMDs out of IRAs soon after turning 70½. The new age for taking RMDs is now 72 for those who are younger than age 70½ at the end of 2019. This won’t alter the plans of most retirees, since they usually start taking those distributions well before age 72 to cover expenses. Roth IRAs have another benefit: they continue to escape distribution requirements, unless they are inherited.

No Age Cap for Traditional IRA Contributions. Workers may now continue to contribute funds into a traditional IRA at any age. Before the SECURE Act, workers had to stop contributing funds once they turned 70½. Note that you or your spouse are still required to have earned income to put funds in a traditional or Roth IRA.

Other Changes. There are many more changes from the SECURE Act and thought leaders in the estate planning community will be reviewing and analyzing the law for months, or perhaps years, to come. Some of the changes that are widely recognized already include the ability to withdraw $5,000 penalty-free from retirement plan accounts per newly born or adopted child, although in most cases, income tax will need to be paid on the withdrawal.

Section 529 educational savings accounts can be used, up to a lifetime limit of $10,000 per student, to pay off student loans. In most states, this will be considered a non-qualified withdrawal and state income taxes will be due, but at least the money can be used for this purpose.

Lastly, there are new tax credits available to smaller companies that set up new retirement plans, and there are new rules regarding including part-time employees in company sponsored 401(k) plans.

The changes from the SECURE Act, particularly regarding the loss of the IRA Stretch, have created a need for people to review their estate plans, if they included leaving large retirement accounts to their children. Speak with your estate planning attorney to ensure that your plan still works.

Reference: Daily Camera (Jan. 11, 2020) “How the new Secure Act affects your retirement”

Not a Billionaire? Trusts Can Still Be Beneficial

You don’t have to be wealthy to benefit from the use of a trust. A trust is a legal arrangement by which one person transfers his or her assets to a trustee who will hold those assets in trust for third parties, explains the Stamford Advocate’s article “Trusts are not for the wealthy only.” As the person who created the trust, referred to as “the settlor,” you determine who the trustee is, as well as naming the beneficiaries.

There are many different types of trusts which serve different purposes. However, the two basic categories of trusts are revocable (also known as “living” trusts) and irrevocable trusts. Their names reflect two chief characteristics: the revocable trust can be changed and controlled by the settlor. The irrevocable trust cannot be changed, and the settlor gives up the control of the trust. However, it should be noted that the irrevocable trust has certain tax and other benefits not offered by the revocable trust.

A will is definitely necessary to pass assets on according to your wishes, but a trust can serve other purposes. Here’s a look at some common reasons why people use trusts:

  • Protect assets from creditors
  • Allow heirs to avoid probate of assets in the trusts
  • Avoid, minimize or delay estate taxes, transfer taxes or income taxes
  • Control how assets are disbursed or invested
  • Facilitate business succession planning and manage business assets
  • Shelter assets for descendants, if a spouse remarries
  • Establish a family tradition of philanthropy

Trusts allow assets to be passed on quickly and privately, while eliminating some expenses for heirs. They also permit closer management of who will benefit from your assets.

The cost of setting up a trust depends on the complexity of the trust and the estate, as well as other factors, like the number of beneficiaries and how many generations are being planned for. Bear in mind that the cost of setting up a trust should be measured against the future cost of not just taxes, but any litigation that might occur if the estate is probated and becomes public knowledge, or if family members are dissatisfied with the distribution of assets.

Speak with an estate planning attorney to first determine what kind of trusts are needed for your estate plan to achieve your wishes. Discuss the role of a Special Needs trust, if any family members have mental or physical needs that make them eligible for public assistance. An experienced estate planning attorney will know which planning strategies are best in your unique circumstances.

Reference: Stamford Advocate (Jan. 19, 2020) “Trusts are not for the wealthy only”

What’s the Best Thing to Do with an Inherited Investment?

Wealth Advisor’s recent article entitled “How to Handle Inherited Investments” provides us with some of the top inheritance considerations:

Consider Cash. Besides cash, the most common inheritances are securities, real estate and art. These assets usually go up in value, but another big benefit is their favorable tax treatment. The heirs won’t pay capital gains on unsold investments that went up in value during the lifetime of the deceased (estate taxes would apply). Those taxes would only apply to the gains that happened after they took possession.  There’s a good reason to hang onto these investments. These types of property carry some risks, so you may consider putting some of your inherited investments into cash, cash equivalents, or life insurance with a guaranteed payout to avoid exposure to undue risk.

Beware of Concentration Risk. It’s not unusual for an inheritance to be heavily concentrated within a specific asset. While the deceased’s instincts may have been accurate at the time of their initial investment, there’s no guarantee that their strategy will continue to pay dividends long term.  Diversifying into other areas—even with high-volatility vehicles that are unrelated to the original inherited investment—can lessen that concentration risk. An even safer strategy would be to build a portfolio of diverse holdings that includes multiple asset classes across different sectors.

Learn about Trusts. Sometimes when people inherit assets through a trust, they don’t think it’s critical to require anything but a superficial understanding of how these work. This is because the trustee assumes nearly all the fiduciary duties. However, this could change when a beneficiary attains a certain age, which often triggers a dissolution of the trust or stipulates a transfer of trustee responsibilities to them. You should understand what will happen at that point. You may want to create your own trust to distribute part or all of your unmanaged inherited assets to heirs in a framework that suits you best, and without having to go through the probate process. In any event, you should learn how trusts work and the difference between revocable and irrevocable trusts. Ask your estate planning attorney about your specific situation and whether there is a trust that may be best for your circumstances.

Reference: Wealth Advisor (Jan. 7, 2020) “How to Handle Inherited Investments”

What Does a Successor Trustee Do?

This is a common concern of people when they learn they have been named as a successor trustee, says nwi.com in the article “Estate Planning: The role of a successor trustee.” The first thing to do? Verify that you are a successor trustee and what authority and powers you have. If the settler is disabled, rather than deceased, you’ll need to be sure that you have complied with any requirements to take the position.

The trust that names you as a successor trustee is likely where you will find details of what you must obtain to assume the authority. For example, you may need to have a letter from a physician stating that the settler is incapacitated and can no longer manage his own affairs.

If the settlor is deceased, establishing your authority as successor trustee is easier. Usually, all you’ll need is a death certificate.

Once this has been established, you’ll need to be able to prove that you have this role. Usually this is done through the use of an Affidavit of Trust and Acceptance and Oath. An estate planning attorney will be able to help you with these documents. Some affidavits affirm until the “pain and penalty of perjury that the affiant is the successor trustee” and that you are accepting the designation and agree to serve under the terms of the trust and the laws of your state.

Different estate planning attorneys may approach this differently. Some may use a “certificate of trust,” while others will simply rely on the trust agreement. The important thing is that the successor trustee’s authority is demonstrable.

Once the successor trustee has established that he is appointed properly, he can start administering the trust.

What about selling the family home? Real estate transfers are handled through the local government. To sell a home, you’ll need to transfer the deed, so you will need the deed to the home.

When a successor trustee transfers real estate, a copy of the affidavit of his appointment as the successor trustee and relevant documents could be recorded with the transfer documents. The transfer needs to be approved by a title examiner, and the examiner will want proof that the person in charge of the transaction has the legal authority to do so.

Other assets are transferred in a similar fashion. The asset holder is contacted, a copy of the affidavit and proof of designation as a successor trustee will be needed.

Some estate planning attorneys will add a letter of instruction to the successor trustee providing them with helpful information and tips about estate administration.

Reference: nwi.com (Jan. 12, 2020) “Estate Planning: The role of a successor trustee”

Some Estate Planning Actions for 2020

Many of us set New Year’s resolutions to improve our quality of life. While it’s often a goal to exercise more or eat more healthily, you can also resolve to improve your financial well-being. It’s a great time to review your estate plan to make sure your legacy is protected.

The Tennessean’s recent article entitled “Five estate-planning steps to take in the new year” gives us some common updates for your estate planning.

Schedule a meeting with your estate planning attorney to discuss your situation and to help the attorney create your estate plan.

You should also regularly review and update all your estate planning documents.

Goals and priorities change, so review your estate documents annually to make certain that your plan continues to reflect your present circumstances and intent. You may have changes to family or friendship dynamics or a change in assets that may impact your estate plan. It could be a divorce or remarriage; a family member or a loved one with a disability diagnosis, mental illness, or addiction; a move to a new state; or a change in a family business. If there’s a change in your circumstances, get in touch with your estate planning attorney to update your documents as soon as possible.

Federal and state tax and estate laws change, so ask your attorney to look at your estate planning documents every few years in light of any new legislation.

Review retirement, investment, and trust accounts to make certain that they achieve your long-term financial goals.

A frequent estate planning error is forgetting to update the beneficiary designations on your retirement and investment accounts. Thoroughly review your accounts every year to ensure everything is up to snuff in your estate plan.

Communicate your intent to your heirs, who may include family, friends, and charities. It is important to engage in a frank discussion with your heirs about your legacy and estate plan. Because this can be an emotional conversation, begin with the basics.

Having this type of conversation now, can prevent conflict and hard feelings later.

Reference: Tennessean (Jan. 3, 2020) “Five estate-planning steps to take in the new year”

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