Stretch Out IRA Distributions, Even Without ‘Stretch’ IRA

It’s sad but true: the SECURE Act took away the long lifetime stretch that so many IRA heirs enjoyed. It was a great efficiency tool for family wealth transfer, but there are ways to fill the gap. A recent article “3 Strategies That Dry Your Stretch IRA Tears” from InsuranceNewsNet.com explains what to do now that IRAs need to be cashed out within ten years of the original owner’s death.

There are a number of tax-efficient planning opportunities, falling into three basic categories: wealth replacement with life insurance, Roth planning and charitable opportunities.

The life insurance policy is straightforward: parents buy life insurance to close the gap between what the IRA could have been, if it had been stretched out over the heir’s lifetime. For parents who are in a lower tax bracket than their children, it might make sense for parents to take distributions out of their IRA and buy insurance with after-tax dollars. This method may also present an opportunity for parents to purchase life insurance with long-term care protection, if they have not already done so.

The “Slow Roth” strategy is for families who might not think they can benefit from a Roth, but they can—just not all at once. By converting an IRA to a Roth IRA over time, only in amounts that keep parents in the same tax bracket, and paying taxes on the conversion slowly and over time, the Roth IRA can be built up so when it is inherited, even though it has to be taken out within ten years after your death, it is income tax free.

The third strategy is for families already planning on making charitable gifts. A Qualified Charitable Distribution, or QDC, lets the owner make distributions directly from their IRA to qualified charities, up to $100,000 annually. Remember that the distribution must go directly to the charity and it cannot be used for a donation to a donor-advised fund or private foundation. Your estate planning attorney will be able to help determine if your charity of choice qualifies.

Finally, you can name a Charitable Remainder Trust as an IRA Beneficiary. This is not a do-it-yourself project and mistakes can be costly. By naming a CRT as a beneficiary of your IRA, you avoid taxes on the entire lump sum when the trust liquidates the IRA. At the same time, the income beneficiary of the trust can receive income from the CRT over their lifetime or a term that you determine. It can’t be more than twenty years from the date of death, but twenty years is a long time. The payments from the trust will be treated as taxable income, so be sure that this will work for the recipient. If you accidentally push them into a higher tax bracket, they may not be quite as grateful as you wanted.

Reference: InsuranceNewsNet.com (Oct. 28, 2020) “3 Strategies That Dry Your Stretch IRA Tears”

Special Needs Plans Need Regular Reviews to Protect Loved Ones
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Special Needs Plans Need Regular Reviews to Protect Loved Ones

Special needs planning is far more detailed than estate planning, although both require regular reviews and updates to be effective. For creating a wholly new plan or reviewing an older plan, one way to start is by writing a biography of a loved one with special needs, recommends the article “Special needs plan should be carefully considered” from The News-Enterprise.

Write down the person’s name, birth date and their age at the time of writing. Include information about favorite activities, closest friends and favorite places. Consider all of the things they like and dislike. Make detailed notes about relationships with family members, including any household pets. Think of it as creating a guide to your loved one for someone who has never met them. This guide will be useful in mapping out a plan that will best suit their needs.

Follow this by writing down what you envision for their future, in three distinct scenarios. A good future, where you are able to care for them, a not-so-great future where they are alive and well, but you are not present in their life and a bad future. You should be as specific as possible. This exercise will provide you with a clear sense of what pitfalls may occur, so you and your estate planning attorney can plan better.

Your plan needs to consider who will become the person’s guardian. You’ll need to list more than one person and put their names in order of preference. Consider the possibility that the first person may not wish to or be able to serve as a guardian and have second and third guardians. Talk to each person to be sure they are willing and able to take on this responsibility.

Next, consider living arrangements. Will your loved one be able to live independently, with regular check ins? Could they live in an accessory apartment with a guardian close at hand? Or would they need to live in a group care facility with an on-site social worker?

A special needs plan usually includes a Special Needs Trust (SNT), with comprehensive details for the trustee. Just as you need multiple guardians, you should also name several trustees. The guardian is responsible for a person and the trustee is responsible for the property.

The question is raised whether a family member or a professional should be the trustee. Having a family member manage the finances is not always the best idea. A professional fiduciary will be able to manage the funds without the emotional ties that could cloud their ability to make good decisions. This is especially important, if the beneficiary has a drug dependency problem, does not have a strong family network or if the estate is large.

Consideration should also be given to having the trustee check in on the beneficiary on a regular basis to ensure that the beneficiary’s needs are being met. The trustee should have permission to make decisions about the use of the trust funds in special circumstances. The trustee will need to be someone who is skilled with managing money and is well-organized and responsible.

Special needs planning is complex, but careful planning will give you the peace of mind of knowing that your loved one will be cared for by people you choose and trust.

Reference: The News Enterprise (Oct. 13, 2020) “Special needs plan should be carefully considered”

 

What are the Responsibilities of a Trustee?

Before accepting the role of a trustee, it is important to have a thorough understanding of what you will need to do and for how long. Trustees are often appointed to manage trust assets for a child or adult with special needs. This responsibility could be for a lifetime, so be sure that you are up for the task. Trustee duties are outlined in a recent article, “Trustee responsibilities,” from InsuranceNewsNet.com.

When the person who set up the trust, known as the “grantor,” dies, the trustee is in charge of settling the trust. That includes tasks like:

1–Locating and reviewing all of the documents of the grantor, especially any funeral and burial instructions.

2–If the grantor owned a home or an apartment, changing the locks for security, notifying the homeowner’s insurance company, if the house will be unoccupied for an extended period of time, and checking on auto insurance policies, if there are cars or other vehicles.

3–Unless the executor is taking care of this task, the trustee needs to obtain multiple originals of the death certificate. These are usually ordered by the funeral director.

4–Listing all assets with the Date of Death (DOD) values of any assets. This determines the “cost basis” of assets that are to be transferred to beneficiaries. If assets are later sold and used to distribute proceeds, the cost-basis is used to determine income tax liability.

5–Consolidate multiple financial accounts into one account. The check register will become a register of trust activities and beneficiaries may inspect it. The trustee’s first responsibility is to protect the trust’s funds.

6–Pay outstanding bills and debts. The trustee may be personally liable, if this is not handled correctly.

7–Meet with an estate planning attorney to determine if the trust must file income tax returns or if the estate of the grantor must file income tax returns.

8–File claims for life insurance, IRAs and annuities.

9–Create an accounting for all trust financial activity from the grantor’s DOD to be distributed to the beneficiaries.

10–Transfer assets to beneficiaries according to the terms of the trust and have an estate planning attorney send each beneficiary a receipt, release and waiver for any further responsibility and liability.

The responsibilities of a trustee are similar to the responsibilities of an executor, except that wills are used in probate court and trusts are created to avoid probate court. Another benefit of trusts is that they can help avoid litigation between beneficiaries and keep the estate’s affairs private.

Reference: InsuranceNewsNet.com (Oct. 19, 2020) “Trustee responsibilities”

Consider Funding a Trust with Life Insurance

How would funding a trust with life insurance work, and could it be a good option for you? A recent article in Forbes “How to Fund a Trust With Life Insurance” explains how this works. Let’s start with the basics: a trust is a legal entity where one party, the trustee, holds legal title to the assets owned by the trust, which is managed for the good of the beneficiary. There can be more than one person who benefits from the trust (beneficiaries) and there can be a co-trustee, but we’ll keep this simple.

Trusts are often funded with a life insurance policy. The proceeds of the policy provide the beneficiary with assets that are used after the death of the insured. This is especially important when the beneficiaries are minor children and the life insurance has been purchased by their parents. Placing the insurance policy within a trust offers more control over how funds are used.

What kind of a trust should you consider? All trusts are either revocable or irrevocable. There are pros and cons to both. Irrevocable trusts are better for tax purposes, as they are not included as part of your estate. However, with an $11.58 million federal exemption in 2020, most people don’t have to worry about federal estate taxes. With a revocable trust, you can make changes to the trust throughout your life, while with an irrevocable trust, only a trustee can make changes.

Note that, in addition to federal taxes, most states have estate taxes of their own, and a few have inheritance taxes. When working with an estate planning attorney, they’ll help you navigate the tax aspect as well as the distribution of assets.

Revocable trusts are the most commonly used trust in estate planning. Here’s why:

  • Revocable trusts avoid probate, which can be a costly and lengthy process. Assets left in the revocable trust pass directly to the heirs, far quicker than those left through the will.
  • Because they are revocable, the creator of the will can make changes to the trust as circumstances change. This flexibility and control make the revocable trust more attractive in estate planning.

If you are using life insurance to fund the trust, be sure the policy permits you to name beneficiaries, and be certain to name beneficiaries. Missing this step is a common and critical mistake. The beneficiary designations must be crystal clear. If there are two cousins who have the same name, there will need to be a clear distinction made as to who is the beneficiary. If someone changes their name, that change must be reflected by the beneficiary designation.

There are many other types of trusts, including testamentary trusts and special needs trusts. Your estate planning attorney will know which trust is best for your situation. Make sure to fund the trust and update beneficiary designations, so the trust will achieve your goals.

Reference: Forbes (Sep. 17, 2020) “How to Fund a Trust With Life Insurance”

How to Choose a Trustee

To protect all that you have worked for and take care of the most important people in your life, you may have been advised to place some or perhaps all of your assets into a trust. Once you and your estate planning attorney have made that decision, you’ll need to decide who to name as your trustee or trustees. Doing so is not always an easy process, explains Kiplinger in the article “Guidance on Choosing the Right Trustee (or Trustees) for Your Estate.”

Serving as a trustee creates many duties under state law, including acting as a fiduciary to the trust. That means the trustee must be impartial about their own interests, put the beneficiary’s interests and well-being first and be prudent with how they invest funds. Law prohibits a trustee from self-dealing.

Here are a series of questions that will help to assess a person’s ability to serve as a trustee:

  • Will the person be able to separate their personal feelings and interests from those of the beneficiaries?
  • Will all parties be treated fairly, especially if your children are not also your spouse’s children?
  • Can your trustee manage complex finances and investments?
  • Is there any risk that your trustee will be tempted to take a risk to obtain money at the expense of beneficiaries?
  • What happens if your spouse remarries?
  • Will a child who is a trustee be fair to the other siblings, even if they are step siblings?
  • Will a child who is managing work and family have the time to take on the responsibilities of the trustee?

Some people decide that no family member is the right fit for the trustee role, and opt instead for their estate planning attorney, accountant or financial advisor to serve as a trustee. There are some questions to ask:

  • Does the person understand the family dynamics?
  • Has the person served as a trustee before?
  • Can they separate their personal financial interest from their clients?
  • If there is a breach of duties, will their professional malpractice coverage be enough to make the trust whole?

Some families prefer to use a bank or trust company to provide fiduciary services and act independently for the trust. This may reduce conflicts among family members, while providing professional services. Fees are typically based on the size of the estate, which may be a consideration.

Another idea is to have more than one trustee to provide a balance of recordkeeping, investments and other trustee duties. A properly drafted trustee agreement, created by an experienced estate planning attorney, will outline specific duties of the trustees. An individual co-trustee might better understand your heir’s needs and be able to help other trustees in making decisions to benefit family members.

Reference: Kiplinger (Sep. 8, 2020) “Guidance on Choosing the Right Trustee (or Trustees) for Your Estate”

Update Will at These 12 Times in Your Life

Estate planning lawyers hear it all the time—people meaning to update their will, but somehow never getting around to actually getting it done. The only group larger than the ones who mean to “someday,” are the ones who don’t think they ever need to update their documents, says the article “12 Different Times When You Should Update Your Will” from Kiplinger. The problems become abundantly clear when people die, and survivors learn that their will is so out-of-date that it creates a world of problems for a grieving family.

There are some wills that do stand the test of time, but they are far and few between. Families undergo all kinds of changes, and those changes should be reflected in the will. Here are one dozen times in life when wills need to be reviewed:

Welcoming a child to the family. The focus is on naming a guardian and a trustee to oversee their finances. The will should be flexible to accommodate additional children in the future.

Divorce is a possibility. Don’t wait until the divorce is underway to make changes. Do it beforehand. If you die before the divorce is finalized, your spouse will have marital rights to your property. Once you file for divorce, in many states you are not permitted to change your will, until the divorce is finalized. Make no moves here, however, without the advice of your attorney.

Your divorce has been finalized. If you didn’t do it before, update your will now. Don’t neglect updating beneficiaries on life insurance and any other accounts that may have named your ex as a beneficiary.

When your child(ren) marry. You may be able to mitigate the lack of a prenuptial agreement, by creating trusts in your will, so anything you leave your child won’t be considered a marital asset, if his or her marriage goes south.

Your beneficiary has problems with drugs or money. Money left directly to a beneficiary is at risk of being attached by creditors or dissolving into a drug habit. Updating your will to includes trusts that allow a trustee to only distribute funds under optimal circumstances protects your beneficiary and their inheritance.

Named executor or beneficiary dies. Your old will may have a contingency plan for what should happen if a beneficiary or executor dies, but you should probably revisit the plan. If a named executor dies and you don’t update the will, then what happens if the second executor dies?

A young family member grows up. Most people name a parent as their executor, then a spouse or trusted sibling. Two or three decades go by. An adult child may now be ready to take on the task of handling your estate.

New laws go into effect. In recent months, there have been many big changes to the law that impact estate planning, from the SECURE Act to the CARES act. Ask your estate planning attorney every few years, if there have been new laws that are relevant to your estate plan.

An inheritance or a windfall. If you come into a significant amount of money, your tax liability changes. You’ll want to update your will, so you can do efficient tax planning as part of your estate plan.

Can’t find your will? If you can’t find the original will, then you need a new will. Your estate planning attorney will make sure that your new will has language that states revokes all prior wills.

Buying property in another country or moving to another country. Some countries have reciprocity with America. However, transferring property to an heir in one country may be delayed, if the will needs to be probated in another country. Ask your estate planning attorney, if you need wills for each country in which you own property.

Family and friends are enemies. Friends have no rights when it comes to your estate plan. Therefore, if families and friends are fighting, the family member will win. If you suspect that your family may push back to any bequests to friends, consider adding a “No Contest” clause to disinherit family members who try to elbow your friends out of the estate.

Reference: Kiplinger (May 26, 2020) “12 Different Times When You Should Update Your Will”

What Is a ‘Survivorship’ Period?

A survivorship clause in a will or a trust says that beneficiaries can inherit, only if they live a certain number of days after the person who made the will or trust dies. The goal is to avoid situations where assets pass under your beneficiary’s estate plan, and not yours, if they outlive you only by a short period of time. While these situations are rare, they do occur, according to the article “How Survivorship Periods Work” from kake.com.

Many wills and trusts contain a survivorship period. Most estates won’t rise to the level of today’s very high federal estate tax exemption ($11.58 million for an individual), so a long survivorship period is not necessary. However, if the surviving spouse must wait too long to receive property under the will—six months or more—it might harm their eligibility for the marital deduction, even if they are made in a qualifying trust or an outright gift.

Even if a will does not contain a survivorship clause, many states require one. Some states require at least a five-day or 120-hour survivorship period. That law might apply to beneficiaries who inherit property under a will, trust or, if there is no will, under state law. This usually does not apply to those who are beneficiaries of an insurance policy, a POD bank account (Payable on Death), or a surviving co-owner of property held in joint tenancy. To learn what states have a set of laws, known as the Uniform Probate Code or the revised version of the Uniform Simultaneous Death Act, speak with a local estate planning lawyer.

Survivorship requirements are put into place in case of simultaneous or close to simultaneous deaths of the estate owners and the estate beneficiaries. This is to avoid having the distribution of assets from an estate owner’s estate distributed according to the beneficiary’s estate plan, and not the estate owner’s plan.

For an example, let’s say Jeff dies and leaves his estate to his sister Judy. Jeff has named his favorite charity as an alternative beneficiary. Jeff’s assets would normally go to his sister Judy. They would only go to his favorite charity, if Judy were not alive at the time of his death. However, if Jeff dies and then Judy dies 14 days later, Jeff’s assets could go to Judy’s beneficiaries under the terms of her will. The charity, Jeff’s intended beneficiary, would receive nothing.

The family would also have the burden of dealing with not one but two probate proceedings at the same time.

However, if a 30-day survivorship clause was in place, the assets would pass to his favorite charity, as originally intended. Jeff’s estate plan would be carried out, according to his wishes.

These are the types of details that make estate planning succeed as the estate owner wishes. Having a complete and secure—and properly prepared—estate plan in place is worth the effort.

Reference: kake.com (March 31, 2020) “How Survivorship Periods Work”