How Can I Move On after a Loved One Dies?

Kiplinger’s recent article entitled “Moving Forward Financially After the Loss of a Loved One” says that there really are no rules about how you should feel or how long it will take you to regain your energy and ability to move forward. Grief is difficult to avoid, but there are many financial and legal tasks that will require your immediate attention. Here are some of the actions that can ease this process and help you to get back on track financially.

Here’s a breakdown of what you will need to address in the near future:

  • Gather important information, such as the deceased’s Social Security number, birth certificate, marriage certificate and military discharge papers.
  • Obtain at least 10 copies of the death certificates, because each claim will need to have an original copy of the death certificate attached.
  • Inform the Social Security office about the death and file a Social Security benefits claim form to qualify for the death benefit.
  • Find the title to any automobiles
  • Print out up-to-date statements for bank, brokerage and retirement accounts.
  • The executor should file the deceased’s will (if there is one) with the Probate Court.
  • The executor should obtain letters testamentary from the court.
  • File a death claim with the deceased’s life insurance company, if applicable.
  • Contact the Employer’s Benefits department about survivorship pension, health insurance, unpaid salary and life insurance benefits, if applicable.
  • Prepare a preliminary monthly budget and income summary.

You should seek the advice of an experienced estate planning or probate attorney. You should also retitle any joint accounts into your name and transfer any inherited IRA into your name and take out a required minimum distribution (RMD), if applicable. New beneficiaries should also be named and deeds for any real estate jointly held with rights of survivorship updated.

You need to file a federal estate tax return within nine months.

Don’t face these challenges alone. Contact an experienced estate planning lawyer for help.

Reference: Kiplinger (Jan. 8, 2020) “Moving Forward Financially After the Loss of a Loved One”

How Will the New SECURE Act Impact My IRAs and 401(k)?

The SECURE Act is the most substantial change to our retirement savings system in over a decade, says Covering Katy (TX) News’ recent article entitled “Laws Change for IRA and 401K Retirement Savings Plans.” The new law, called the Setting Every Community Up for Retirement Enhancement (SECURE) Act, includes several important changes. Let’s take a look at them.

There is a higher age for RMDs. The current law says that you must start taking withdrawals or required minimum distributions from your traditional IRA and 401(k) or similar employer-sponsored plan when you turn 70½. The new law delays this to age 72, so you can hold on to your retirement savings a while longer.

No age limit for contributions to traditional IRAs. Before the new law, you could only contribute to your traditional IRA until you were 70½. However, now you can now fund your traditional IRA for as long as you have taxable earned income.

Stretch IRA Limitations. Previously, beneficiaries could stretch taxable RMDs from a retirement account over his or her lifetime. Under the SECURE Act, spouse beneficiaries can still take advantage of this “stretch” distribution, but most non-spouse beneficiaries will have to take all the RMDs by the end of the 10th year after the account owner dies. Therefore, non-spouse beneficiaries who inherit an IRA or other retirement plan could have tax issues, because of the need to take larger distributions in a shorter amount of time.

Early withdrawal penalty eliminated for IRAs and 401(k)s when new child arrives. Usually, you must pay a 10% penalty when you withdraw funds from your IRA or 401(k) if done prior to 59½. However, the new legislation allows you take out up to $5,000 from your retirement plan without paying the early withdrawal penalty, provided you withdraw the money within a year of a child being born or an adoption becoming final.

There are provisions of the SECURE Act that primarily impact business owners, which include the following:

New multi-employer retirement plans. The new law allows unrelated companies to coordinate to offer employees a 401(k) plan with less administrative work, lower costs and fewer fiduciary responsibilities than individual employers now have when offering their own retirement plans.

Tax credit for automatic enrollment. There’s now a tax credit of $500 for some small businesses that create automatic enrollment in their retirement plans. A tax credit for establishing a retirement plan has also been increased from $500 to $5,000.

Annuities in 401(k) plans. The Act makes it easier for employers to add annuities as an investment option within 401(k) plans. Before the SECURE Act, businesses avoided annuities in these plans because of the liability related to the annuity provider. However, the new rules should help decrease any concerns.

Talk to an experienced estate planning attorney to examine the potential impact on your investment strategies and determine any possible tax and estate planning implications of the SECURE Act.

Reference: Covering Katy (TX) News “Laws Change for IRA and 401K Retirement Savings Plans”

SECURE Act Means It’s Time for an Estate Plan Review
401k concept photo

SECURE Act Means It’s Time for an Estate Plan Review

The most significant legislation affecting retirement was signed into law on Friday, Dec. 20, 2019. After stalling for months, Congress suddenly passed several bills, as attachments to budget appropriations, as reported by Advisor News’ article “SECURE Act, Signed by Trump, A Game-Changer For Retirement Plans.”

Here are some of the key points that retirees and those planning their retirements need to know:

Changes to Age Limits for IRA and 401(k) Accounts. The age for taking Required Minimum Distributions (RMDs) has increased from 70½ to 72 years. Adding a year and a half for investors to put away money for retirement gives a little more time to prepare for longer lifespans. The change recognizes the prior limits were arbitrary, and that Americans need to save more.

However, the SECURE Act also brought about the demise of the “stretch” IRA. Americans who inherit an IRA must now withdraw the money within 10 years of the account owner’s death, along with paying taxes. Surviving spouses and minor children are still exempt. The exempt heirs can still spend down inherited IRA accounts over their lifetime, which is an estate planning strategy known as the “stretch.”

Small Business 401(k)s. The SECURE Act expands access to Multiple Employer Plans, known as MEPs, so that employers can pool resources and share the costs of retirement plans for employees. This will cut administration and management costs and ideally, will allow more small businesses to offer higher-quality plans available to their employees.

The law also enhances automatic enrollment and auto-escalation, letting companies automatically enroll employees into a retirement plan at a rate of 6%, instead of 3%. Employers can now raise employee contributions to a maximum of 15% of their annual pay, although workers can opt out of these plans at any time.

Annuities Options. The SECURE Act now allows 401(k) plans to offer annuities as a retirement plan option. Experts have mixed opinions on this. Annuities are a type of life insurance that convert retirement savings into lifetime income. However, fees are often high, and if the insurance company closes its doors, those lifetime income payments may vanish. Under the new law, employers also have what’s called a “safe harbor” from being sued, if annuity providers go out of business or stop making payments to annuity purchasers. Being freed from liability may make employers more likely to offer annuities, but that may put 401(k) investors at more risk, say consumer advocates.

529 Plans and Saving for Children. The new law expands 529 accounts to cover many more types of education, from registered apprenticeships, homeschooling, private elementary, secondary or religious schools. Up to $10,000 can be used for qualified student loan repayments, including for siblings.

Reference: Advisor News (December 23, 2019) “SECURE Act, Signed by Trump, A Game-Changer For Retirement Plans”

How Can Life Insurance Help My Estate Plan?

In the 1990s, it wasn’t unusual for people to buy second-to-die life insurance policies to help pay federal estate taxes. However, in 2019, with estate tax exclusions up to $11,400,000 (and rising with the cost-of-living adjustments), fewer people would owe much for estate taxes.

However, IRAs, 401(k)s, and other accounts are still 100% taxable to the individuals, spouses and their children. The stretch IRA options still exist, but they may go away, as Congress may limit stretch IRAs to a maximum of 10 years.

Forbes’ recent article, “3 Ways Life Insurance Can Help Your Estate Plan,” explains that as the IRA is giving income from the RMDs, it may also be added, after tax, to the life insurance policy. If this occurs, it’s even possible that the death benefits could grow in the future, giving a cost-of-living benefit to children. This is one way how life insurance can be used creatively to help your estate plan.

For married couples, one strategy is to consider how life insurance on one individual could be used to pay “conversion tax” at death, using tax-free benefits. When the retiree dies, the spouse beneficiary can then convert all the IRA (taxable money) to a Roth IRA, which is tax-exempt with new, lower income tax rates (37% in 2018-2025 versus 39.6% in 2017 or earlier).

This tax-free death benefit money can be used to pay the taxes on the conversion, letting the surviving beneficiary have a lifetime of tax-exempt income without RMD issues from the Roth IRA. The Social Security income could also be tax-exempt, because Roth withdrawals don’t count as “income” in the calculation to see how much of your Social Security is taxed. However, you’d have to be within the threshold for any other combined income.

Life insurance for both individuals (if married) may also be a good idea. If the spouse of the IRA owner dies, the money from the life insurance can be used once again. If this is done in the tax year of the death for married individuals, the tax conversion could be done under “married filing status” before the next year, when the individual must use single tax filing status.

Another benefit of the IRA-to-Roth conversion is the passing of Roth IRAs to heirs, which could create a lasting legacy, if planned well. New life insurance policies that add long-term care features with chronic care and critical care benefits can also provide an extra degree of benefits, if one of the insureds has health issues prior to death.

Be sure to watch the tax rates and possible changes. With today’s lower tax rates, this could be very beneficial. Remember that there are usually individual state taxes as well. However, considering all the tax-optimized benefits to spouses and beneficiaries, the long-term tax benefits outweigh the lifetime tax liabilities, especially when you also consider SSI tax benefits for the surviving spouse and no RMD issues.

Life insurance in retirement can help protect, build and transfer wealth in one of the easiest ways possible. If you’re not certain about where to start with your life insurance needs, speak with an experienced estate planning attorney.

Reference: Forbes (November 15, 2019) “3 Ways Life Insurance Can Help Your Estate Plan”

What Can I Do with an Inherited 401(k)?

Inheriting a 401(k) at the death of the account owner isn’t always as simple as inheriting a home or a piece of jewelry. The IRS has rules that 401(k) beneficiaries must follow that say when and how much tax they’ll pay to inherit someone else’s retirement plan. If you’re currently the beneficiary of a 401(k) or you’ve recently inherited one, here are some important things you need to know.

Smart Assets’s recent article entitled “A Guide to Inheriting a 401(k)” explains that if a spouse of the account owner waives their right to inherit a 401(k) or the account owner is unmarried, they can leave their account to whomever they want at their death.

An inherited 401(k) is taxed is based on three key factors: (i) your relationship to the account owner; (ii) your age when you inherit the 401(k); and (iii) the account owner’s age when they die.

There’s also several ways to take a distribution from a 401(k) when you’ve inherited it: you can do a lump sum, periodic payments, or distributions stretched out over your life expectancy.

If you inherit a 401(k) from your spouse, what you decide to do with it and the subsequent tax impacts may be based primarily upon your age. If you’re under age 59½, you have a choice of three things:

  1. Keep the money in the plan and take distributions. You can take withdrawals from the account without the 10% early withdrawal penalty. You’d still pay regular income tax on any distributions you take. If your spouse was age 70½ or older when they passed away, you would have to take required minimum distributions from this account. There’d be no early withdrawal penalty. However, you’d pay income tax on the withdrawals. If the spouse was younger than 70½ when they died, you could wait to take RMDs until you turn 70½.
  2. Move the money to an inherited IRA. This is an IRA that’s designed to hold rollover funds from an inherited retirement plan, including 401(k)s. You can make withdrawals without any early withdrawal penalty. With this type of account, you’d need to take RMDs. However, the amount would be based on your own life expectancy, not the amount your spouse would have been required to take.
  3. Move the money to your own IRA. If you already have an IRA, you could roll an inherited 401(k) into it with no tax penalty. However, if you’re under age 59½ when you execute the rollover, the withdrawal will be treated like a regular distribution, so you’ll pay income tax on the full amount, along with the 10% early withdrawal penalty. If you’re over age 59½, you won’t pay an early withdrawal penalty with any of these options. If your spouse was taking RMDs from their 401(k) when they died, you’d have the option to continue taking them or delay taking them until you turn 70½. If you’re already 70½ or older, you’d need to take RMDs, regardless of whether you leave the money in the 401(k), transfer it to an inherited IRA or roll it over to your existing IRA.

If you inherit a 401(k) from someone other than your spouse, your options are linked to how old the account owner was when you inherited the plan and the plan’s distribution rules. If the account owner hadn’t yet turned 70½, the plan may let you spread distributions out over your lifetime or spread them out over a five-year period. If you take the five-year option, you may have to fully withdraw all of the account assets by the end of the fifth year following the account owner’s death. In either case, you’d pay income tax on the withdrawals.

You could also roll the account over to an inherited IRA, if the plan permits this. Here, the RMDs would be based on your life expectancy, assuming the account owner hadn’t started taking them yet. If they had started with their RMDs, you’re required to continue taking those distributions. However, you could base the distribution amount on your life expectancy, rather than that of the account owner.

Speak with an experienced estate planning attorney to help you determine the route that makes the most sense to reduce taxes, while planning ahead for the future.

Reference: Smart Asset (October 22, 2019) “A Guide to Inheriting a 401(k)”

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