Should I Add that to My Will?

In general, a last will and testament is an easy and straightforward way to state who gets what when you die and designate a guardian for your minor children, if you (and your spouse) die unexpectedly.

MSN’s recent article entitled “Things you should never put in your will” explains that you can be specific about who receives what. However, attaching strings or conditions may not work because there’s no one to legally enforce the terms. If you have specific details about how a person should use their inheritance, whether they are a spendthrift or someone with special needs, a trust may be a better option because you’ll have more control, even from beyond the grave.

Keeping some assets out of your will can actually benefit your future heirs because they’ll get their inheritance faster. When you pass on, your will must be “proven” and validated in a probate court prior to distribution of your property. This process takes some time and effort, if there are issues—including something in your will that doesn’t need to be there. For example, property in a trust and payable-on-death accounts are two types of assets that can be distributed to your beneficiaries without a will.

Don’t put anything in a will that you don’t own outright. If you jointly own assets with someone, they will likely become the new owner. For example, this applies to a property acquired by married couples in community property states.

Property in a revocable living trust. This is a separate entity that you can use to distribute your assets which avoids probate. When you title property into the trust, it is subject to the trust’s rules.  Because a trust operates independently, you must avoid inconsistencies and not include anything in your will that the trust addresses.

Assets with named beneficiaries. Some financial accounts are payable-on-death or transferable-on-death. They are distributed or paid out directly to the named beneficiaries. That makes putting them in a will unnecessary (and potentially troublesome, if you’re inconsistent). However, you can add information about these assets in your letter of instruction (see below). As far as bank accounts, brokerage or investment accounts, retirement accounts and pension plans and life insurance policies, assign a beneficiary rather than putting these assets in your will.

Jointly owned property. Property you jointly own with someone else will almost always directly pass to the co-owner when you die, so do not put it in your will. A common arrangement is joint tenancy with rights of survivorship.

Other things you may not want to put in a will. Businesses can be given away in a will, but it’s not the best plan. Wills must be probated in court and that can create a rough transition after you die. Instead, work with an experienced estate planning attorney on a succession plan for your business and discuss any estate tax issues you may have as a business owner.

Adding your funeral instructions in your will isn’t optimal. This is because the family may not be able to read the will before making arrangements. Instead, leave a letter of instruction with any personal wishes and desires.

Reference: MSN (Dec. 8, 2020) “Things you should never put in your will”

What Do You Do with a Big Inheritance?

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

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

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

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

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

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

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

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

Finally, speak with an experienced estate planning attorney, so you can incorporate your inheritance into your own estate plan.

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

Does My Estate Plan Need an Audit?

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

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

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

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

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

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

If, after your audit, you find that your plans need to be revised, follow these steps:

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

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

What’s Involved in the Probate Process?

SWAAY’s recent article entitled “What is the Probate Process in Florida?” says that while every state has its own laws, the probate process can be fairly similar. Here are the basic steps in the probate process:

The family consults with an experienced probate attorney. Those mentioned in the decedent’s will should meet with a probate lawyer. During the meeting, all relevant documentation like the list of debts, life insurance policies, financial statements, real estate title deeds, and the will should be available.

Filing the petition. The process would be in initiated by the executor or personal representative named in the will. He or she is in charge of distributing the estate’s assets. If there’s no will, you can ask an estate planning attorney to petition a court to appoint an executor. When the court approves the estate representative, the Letters of Administration are issued as evidence of legal authority to act as the executor. The executor will pay state taxes, funeral costs, and creditor claims on behalf of the decedent. He or she will also notice creditors and beneficiaries, coordinate the asset distribution and then close the probate estate.

Noticing beneficiaries and creditors. The executor must notify all beneficiaries of trust estates, the surviving spouse and all parties that have the rights of inheritance. Creditors of the deceased will also want to be paid and will make a claim on the estate.

Obtaining the letters of administration (letters testamentary) obtained from the probate court. After the executor obtains the letter, he or she will open the estate account at a bank. Statements and assets that were in the deceased name will be liquidated and sold, if there’s a need. Proceeds obtained from the sale of property are kept in the estate account and are later distributed.

Settling all expenses, taxes, and estate debts. By law, the decedent’s debts must typically be settled prior to any distributions to the heirs. The executor will also prepare a final income tax return for the estate. Note that life insurance policies and retirement savings are distributed to heirs despite the debts owed, as they transfer by beneficiary designation outside of the will and probate.

Conducting an inventory of the estate. The executor will have conducted a final account of the remaining estate. This accounting will include the fees paid to the executor, probate expenses, cost of assets and the charges incurred when settling debts.

Distributing the assets. After the creditor claims have been settled, the executor will ask the court to transfer all assets to successors in compliance with state law or the provisions of the will. The court will issue an order to move the assets. If there’s no will, the state probate succession laws will decide who is entitled to receive a share of the property.

Finalizing the probate estate. The last step is for the executor to formally close the estate. The includes payment to creditors and distribution of assets, preparing a final distribution document and a closing affidavit that states that the assets were adequately distributed to all heirs.

Reference: SWAAY (Aug. 24, 2020) “What is the Probate Process in Florida?”

How 401(K) Beneficiaries Work with Your Estate Plan

For anyone who thinks that their will or trust can be used to distribute assets in a 401(k) after they pass, think again. The beneficiaries listed in a 401(k), insurance policy or any account with the option to name a beneficiary supersede whatever directions are placed in a will or a trust. If you’re not careful, warns the article “What You Should Know About 401(k) Beneficiaries” from The Motley Fool, your assets could end up in the wrong hands.

Here are some basics about beneficiaries that you need to know.

After you die, your estate goes through probate, which can be a costly and lengthy process. However, assets like 401(k) plans that have named beneficiaries are typically passed to heirs outside of probate. The asset goes directly to the beneficiary.

When you opened a 401(k), you were almost certainly directed to name a beneficiary in the paperwork used to establish the account. That person is usually a spouse, child or a domestic partner.  The beneficiary is sometimes a trust (a legal entity that manages assets for the benefit of beneficiaries).

If no beneficiary was named and you were married when you established the account, most 401(k) plans designate your spouse as the default beneficiary. The surviving spouse is allowed to treat the account as if it is their own when they inherit it—they can delay withdrawing money until they are 72, when the IRS requires withdrawals to begin. The surviving spouse uses their own life expectancy, when calculating future withdrawals.

If someone other than a spouse was listed as the beneficiary, the assets are to be transferred into an inherited 401(k) and the amounts received are based on the percentage listed on the beneficiary designation form. Most plans give the beneficiaries the option to roll over an inherited 401(k) into an inherited IRA. This gives the account owners greater control over what they can do with their inheritance.

Once you have named a beneficiary on these accounts, it’s wise to list contingent beneficiaries, who will inherit the accounts, if the primary beneficiary is deceased. For most families, the children are the contingent beneficiaries and the spouse is the primary beneficiary.

The list of mistakes made when naming beneficiaries is a long one, but here are a few:

  • Setting up a trust to keep IRA or 401(k) assets from going to a minor or to protect services for a special needs child, then failing to list the trust as a beneficiary.
  • Not naming anyone as a beneficiary on an IRA or 401(k) plan.
  • Neglecting to check beneficiary names every few years or after big life changes.

If you set up a trust for your beneficiaries, you must list the trust as the beneficiary. If you don’t specifically list the trust, the account will pass to any person listed as a beneficiary, or the accounts will go through probate.

If you have had more than a few jobs and have more than a few 401(k) accounts, it can be challenging to track the accounts and the beneficiaries. Consolidating the accounts into one 401(k) account makes it easier for you and for your heirs.

If you do list a trust as a beneficiary, talk with your estate planning attorney about how to do this correctly. The trust’s language must take into consideration how taxes will be handled. This could have big costs for your heirs.

Reference: The Motley Fool (Aug. 24, 2020) “What You Should Know About 401(k) Beneficiaries”

Do I Qualify as an Eligible Designated Beneficiary under the SECURE Act?

An eligible designated beneficiary (EDB) is a person included in a unique classification of retirement account beneficiaries. A person may be classified as an EDB, if they are classified as fitting into one of five categories of individuals identified in the Setting Every Community Up for Retirement Enhancement (SECURE) Act. The bill passed in December 2019 and is effective for all inherited retirement accounts, as of the first of this year.

Investopedia’s recent article entitled “Eligible Designated Beneficiary” explains that these people get special treatment and greater flexibility to withdraw funds from their inherited accounts than other beneficiaries.

With the SECURE Act, there are now three types of beneficiaries. It is based on the individual’s connection to the original account owner, the beneficiary’s age, and his or her status as either an individual or a non-person entity. However, an EDB is always an individual. On the other hand, an EDB can’t be a trust, an estate, or a charity, which are considered not designated beneficiaries. There are five categories of individuals included in the EDB classification. These are detailed below.

In most instances, except for the exceptions below, an EDB must withdraw the balance from the inherited IRA account over the beneficiary’s life expectancy. There is optional special treatment allowed only for surviving spouses, which is explained below. When a minor child reaches the age of majority, he or she is no longer considered to be an EDB, and the 10-year rule concerning withdrawal requirements for a designated beneficiary applies.

Here are the five categories of EDBs.

Owner’s surviving spouse. Surviving spouses get special treatment, which lets them step into the shoes of the owner and withdraw the balance from the IRA over the original owner’s life expectancy. As another option, they can roll an inherited IRA into their own IRA and take withdrawals at the point when they’d normally take their own required minimum distributions (RMDs).

Owner’s minor child. A child who isn’t yet 18 can make withdrawals from an inherited retirement account using their own life expectancy. However, when he or she turns 18, the 10-year rule for designated beneficiaries (who aren’t EDBs) applies. At that point, the child would have until December 31 of the 10th year after their 18th birthday to withdraw all funds from the inherited retirement account. A deceased retirement account owner’s minor child can get an extension, up until age 26, for the start of the 10-year rule, if he or she is pursuing a specified course of education.

An individual who is disabled. The tax code says that an individual is considered to be disabled if he or she is “unable to engage in any substantial gainful activity by reason of any medically determinable physical or mental impairment which can be expected to result in death or to be of long continued and indefinite duration.” A disabled person who inherits a retirement account can use their own life expectancy to calculate RMDs.

An individual who is chronically ill. The tax code states that “the term ‘chronically ill individual’ means any individual who has been certified by a licensed healthcare practitioner as—

  • being unable to perform (without substantial assistance from another individual) at least two activities of daily living for a period of at least 90 days, due to a loss of functional capacity,
  • having a level of disability similar (as determined under regulations prescribed by the Secretary in consultation with the Secretary of Health and Human Services) to the level of disability described in clause (i), or
  • requiring substantial supervision to protect such individual from threats to health and safety due to severe cognitive impairment.”

A chronically ill individual who inherits a retirement account can use their own life expectancy to determine the RMDs.

Any other person who’s less than 10 years younger than the decedent. This is a catch-all that includes certain friends and siblings (depending on age), who are identified as beneficiaries of a retirement account. This also excludes most adult children (who aren’t disabled or chronically ill) from the five categories of EDBs. A person in this category who inherits a retirement account is permitted to use their own life expectancy to calculate RMDs.

Reference: Investopedia (June 25, 2020) “Eligible Designated Beneficiary” 

What If Grandma Didn’t Have a Will and Died from COVID-19?

The latest report shows about 1.87 million reported cases and at least 108,000 COVID-19-related deaths were reported in the U.S., according to data released by Johns Hopkins University and Medicine.

Here’s a question that is being asked a lot these days: What happens if someone dies “intestate,” or without having established a will or estate plans?

If you die without a will in California and many other states, your assets will go to your closest relatives under state “intestate succession” statutes.

Yahoo Finance’s recent article entitled “My loved one died without a will – now what?” explains that there are laws in each state that will dictate what happens, if you die without a will.

In Pennsylvania, the laws list the order of who receives upon your death, if you die without a will: your spouse, your children, and then your parents (if still alive), your siblings, and then on down the line to cousins, aunts and uncles, and the like. Typically, first on every state’s list is the spouse and the children.

You may also have some valuable assets that will not pass via your will and aren’t affected by your state’s intestate succession laws. Here are some of the common ones:

  • Any property that you’ve transferred to a living trust
  • Your life insurance proceeds
  • Funds in an IRA, 401(k), or other retirement accounts
  • Any securities held in a transfer-on-death account
  • A payable-on-death bank account
  • Your vehicles held by transfer-on-death registration; or
  • Property you own with someone else in joint tenancy or as community property with the right of survivorship.

These types of assets will pass to the surviving co-owner or to the beneficiary you named, whether or not you have a will.

It’s quite unusual for the government to claim a deceased person’s estate. While it might be allowed in some states, it’s considered a last resort. Typically, we all have some relatives.

If you have a loved one who has died without a will, speak with an experienced estate planning attorney about your next steps.

Reference: Yahoo Finance (June 1, 2020) “My loved one died without a will – now what?”

Using Retirement Funds in a Financial Crisis

For generations, the tax code has been a public policy tool, used to encourage people to save for retirement and what used to be called “old age.” However, the coronavirus pandemic has created financial emergencies for so many households that lawmakers have responded by making it easier to tap these accounts. The article “Should You Tap Retirement Funds in a Crisis? Increasingly, People Say Yes” from The Wall Street Journal asks if this is really a good idea.

This shift in thinking actually coincides with trends that began to emerge before the last recession. People were living and working longer. Unemployment and career changes later in life were becoming more commonplace, and fewer and fewer people devoted four decades to working for a single employer, before retiring with an employer-funded pension.

For those who have been affected by the economic downturns of the coronavirus, withdrawals up to $100,000 from retirement savings accounts are now allowed, with no early-withdrawal penalty. That includes IRAs (Individual Retirement Accounts) or employment-linked 401(k) plans. In addition, $100,000 may be borrowed from 401(k) plans.

Americans are not alone in this. Australia and Malaysia are also allowing citizens to take money from retirement accounts.

Lawmakers are hoping that putting money into pockets now may help households prevent foreclosures, evictions and bankruptcies, with less of an impact on government spending. With trillions in retirement accounts in the U.S., these accounts are where legislators frequently look when resources are threatened.

However, there’s a tradeoff. If you take out money from accounts that have lost value because of the market’s volatility, those losses are not likely to be recouped. And if money is taken out and not replaced when the world returns to work, there will be less money during retirement. Not only will you miss out on the money you took out, but on the return, it might have made through years of tax-advantaged investments.

The danger is that if retirement accounts are widely seen as accessible and necessary now, a return to saving for retirement or the possibility of putting money back into these accounts when the economy returns to normal may not happen.

IRA and 401(k) accounts began to supplant pensions in the 1970s as a way to encourage people to save for retirement, by deferring income tax on money that was saved. By the end of 2019, IRAs and 401(k) types of accounts held about $20 trillion in the US.

Boston College’s Center for Retirement Research has estimated that even before the coronavirus, early withdrawals were reducing retirement accounts by a quarter over 30 years, taking into account the lost returns on savings that were no longer in the accounts. For many people, taking retirement funds now may be their only choice, but the risk to their financial future and retirement is very real.

Reference: The Wall Street Journal (June 4, 2020) “Should You Tap Retirement Funds in a Crisis? Increasingly, People Say Yes”

What You Need to Know about Drafting Your Will

A last will and testament is just one of the legal documents that you should have in place to help your loved ones know what your wishes are, if you can’t say so yourself, advises CNBC’s recent article entitled, “Here’s what you need to know about creating a will.” In this pandemic, the coronavirus may have you thinking more about your mortality.

Despite COVID-19, it’s important to ponder what would happen to your bank accounts, your home, your belongings or even your minor children, if you’re no longer here. You should prepare a will, if you don’t already have one. It is also important to update your will, if it’s been written.

If you don’t have a valid will, your property will pass on to your heirs by law. These individuals may or may not be who you would have provided for in a will. If you pass away with no will —dying intestate — a state court decides who gets your assets and, if you have children, a judge says who will care for them. As a result, if you have an unmarried partner or a favorite charity but have no legal no will, your assets may not go to them.

The courts will typically pass on assets to your closest blood relatives, despite the fact that it wouldn’t have been your first choice.

Your will is just one part of a complete estate plan. Putting a plan in place for your assets helps ensure that at your death, your wishes will be carried out and that family fights and hurt feelings don’t make for destroyed relationships.

There are some assets that pass outside of the will, such as retirement accounts, 401(k) plans, pensions, IRAs and life insurance policies.

Therefore, the individual designated as beneficiary on those accounts will receive the money, despite any directions to the contrary in your will. If there’s no beneficiary is listed on those accounts, or the beneficiary has already passed away, the assets automatically go into probate—the process by which all of your debt is paid off and then the remaining assets are distributed to heirs.

If you own a home, be certain that you know the way in which it should be titled. This will help it end up with those you intend, since laws vary from state to state.

Ask an estate planning attorney in your area — to ensure familiarity with state laws—for help with your will and the rest of your estate plan.

Reference: CNBC (June 1, 2020) “Here’s what you need to know about creating a will”

How the CARES Act has Changed RMDs for 2020

Before the CARES Act, most retirees had to take withdrawals from their IRAs and other retirement accounts every year after age 72. However, the Coronavirus Aid, Relief and Economic Security Act, known as the CARES Act, has made some big changes that help retirees. Whether you have a 401(k), IRA, 403(b), 457(b) or inherited IRA, the rules have changed for 2020. A recent article in U.S. News & World Report, “How to Skip Your Required Minimum Distribution in 2020,” explains how it works.

For starters, remember that taking money out of any kind of account that has been hit hard by a market downturn, locks in investment losses. This is especially a hard hit for people who are not working and won’t be able to put the money back. Therefore, if you don’t have to take the money, it’s best to leave it in the retirement account until markets recover.

RMDs are based on the year-end value of the previous year, so the RMD for 2020 is based on the value of the account as of December 31, 2019, when values were higher.

Remember that distributions from traditional 401(k)s and IRAs are taxed as ordinary income. A retiree in the 24% bracket who takes $5,000 from their IRA is going to need to pay $1,200 in federal income tax on the distribution. By postponing the withdrawal, you can continue to defer taxes on retirement savings.

Beneficiaries who have inherited IRAs are usually required to take distributions every year, but they too are eligible to defer taking distributions in 2020. Experts recommend that if at all possible, these distributions should be delayed until 2021.

Automatic withdrawals are how many retirees receive their RMDs. That makes it easier for retirees to avoid having to pay a huge 50% penalty on the amount that should have been withdrawn, in addition to the income tax that is due on the distribution. However, if you are planning to skip that withdrawal, make sure to turn off the automated withdrawal for 2020.

If you already took the distribution before the law was passed (in March 2020), you might be able to roll the money over to an IRA or workplace retirement account, but only within 60 days of the distribution. You can also only do that once within a 12-month period. If the deadline for a rollover contribution falls between April 1 and July 14, you have up to July 15 to put the funds into a retirement account.

For those who have contracted COVID-19 or suffered financial hardship as a result of the pandemic, the distribution might qualify as a coronavirus hardship distribution. Talk with your accountant about classifying the distribution as a COVID-19 related distribution. This will give you an option of spreading the taxes over a three-year period or putting the money back over a three-year period.

Reference: U.S. News & World Report (May 4, 2020) “How to Skip Your Required Minimum Distribution in 2020”