Annapolis, Maryland Wills, Trusts & Estate Planning

How Can a Roth IRA Reduce the Tax Burden Facing Your Heirs? – Annapolis Estate Planning

There’s more than retirement savings power in a Roth IRA. Used properly, it can help cut your beneficiary’s tax liability, regardless of if and when tax reform becomes reality.

If you’re interested in reducing the taxes your heirs will have to pay, you’re probably concerned about the discussion about tax reform going on in Washington these days. Unfortunately, there’s no way to be certain what, if any, changes will actually occur. In the meantime, your estate planning attorney can help you structure your estate, so that less of it ends up being consumed by taxes. That includes moving funds into non-taxable accounts, including Roth IRAs.

Motley Fool’s recent article, “A Clever Way to Cut Your Heirs' Income Taxes,” says the money you put into a Roth retirement savings account has already been taxed. It was taxed on the contributions you made or as a rollover from a tax-deferred retirement savings account. As a result, everything in that account is now non-taxable for income-tax purposes. As the Roth has been open for at least five years prior to your death, the money in that account won’t be subject to federal income taxes.

In the event you leave the money in your Roth rather than spending it during your retirement, after your death, the account will be transferred to the person you designated as a beneficiary. At that point, the Roth account will be subject to the IRS's rules for inherited IRAs.

The beneficiary must then begin to take distributions based on their predicted lifespan (pursuant to the IRS’s actuarial tables). If your beneficiary doesn't simply blow the money in the account right away, the balance in the Roth will continue to grow tax-free, providing them with some untaxed income in the future.

In order for this to work, you’ll want to avoid spending any of the money in the Roth account while you are alive. This means that you should make sure you have other sources of income to finance your retirement.

Remember that you can do a Roth conversion at any age, even if you did not set up a Roth account before retirement.

Reference: Motley Fool (September 14, 2017) “A Clever Way to Cut Your Heirs' Income Taxes”

Holden & Campbell, LLC – Annapolis Estate Planning Attorneys

Less Well Known Benefits of IRAs – Annapolis Estate Planning

Certain creditor protection aspects of IRAs have the potential to protect heirs from creditors, but there are issues, so you’ll want to plan these out carefully.

Everyone knows that IRAs are a great way to save for retirement, but the potential to protect against creditors is another valuable aspect of these accounts. Is the same protection extended to beneficiaries? This article from Forbes, “Estate Planning Tip: Creditor Protection for IRAs & Beneficiaries,” explains in detail how these rules apply to various bankruptcy situations and the issues to consider when naming your IRA beneficiaries.

Bankruptcy. Similar to the protection offered to pensions, 401(k)s and Social Security benefits, IRAs can be protected from creditors in bankruptcy. If you declare bankruptcy, your IRA assets will typically be safeguarded and can’t be taken. However, this doesn’t extend to other types of judgments, civil lawsuits, or IRS levies. State laws will vary, but your IRA assets may be protected from other creditors. There is a $1 million inflation-adjusted limit that applies to federal bankruptcy protection rules for the aggregate value of Contributory and Roth IRAs (with inflation, the limit is $1,283,025 as of April 1, 2016). Assets rolled over to an IRA from a qualified plan, like a 401(k), aren’t subject to the same dollar limits and can be fully protected.

Beneficiaries Protection. A big benefit to IRAs is the simplicity in selecting a beneficiary to receive the money when you die. This can be a great estate planning tool because these assets are not subject to probate and pass directly to the beneficiary. Make sure that your beneficiary designations line up with your overall estate planning goals. However, beneficiaries of IRAs are not always given the same creditor protection as the original account owner, so you need to consider this when selecting your IRA beneficiary.

An inherited IRA for a non-spouse beneficiary is no longer automatically protected from creditor’s claims when the beneficiary files for bankruptcy. When the owner dies, and the non-spouse beneficiary takes ownership of the account, the assets are no longer deemed retirement funds, and can be seized in bankruptcy. This only applies to non-spouse beneficiaries because a spouse can roll over inherited IRA assets into his or her own account. When this transfer occurs to a surviving spouse, the assets are once again protected. However, a non-spouse beneficiary can’t comingle inherited IRA assets with their own retirement assets. Check your state laws on the degree of protection over non-spousal inherited retirement funds.

Children as beneficiaries. Many parents opt for their children to be beneficiaries of their IRA accounts. This can be an issue if the children have financial issues or face debt collectors. You can get around this be creating a conduit trust, and by listing the trust as beneficiary of the IRA and not the child. As a result, an inherited IRA payable to a trust can be protected from the child’s creditors while still allowing the child to benefit from the inheritance. The IRA’s required minimum distributions are calculated on the trust beneficiary’s life expectancy, and income is taxed at the beneficiary’s tax rate. Since the assets aren’t legally owned by the beneficiary, they’re protected from creditors in most instances. However, keep in mind that once the income is paid out to the beneficiary, that income isn’t protected.

Like so many other estate plans, IRA beneficiaries should be reviewed regularly. Your own goals may change, and your beneficiaries will also experience changes in their lives. If a child is going through a divorce, for instance, you may want to work with a qualified estate planning attorney to find a way to protect your legacy and your child. Your state’s laws on creditor protection may change, as may tax laws. A regular review with an estate planning attorney is a worthwhile investment.

Reference: Forbes (December 9, 2016) “Estate Planning Tip: Creditor Protection for IRAs & Beneficiaries”

Less Well Known Benefits of IRAs – Annapolis Estate Planning

Certain creditor protection aspects of IRAs have the potential to protect heirs from creditors, but there are issues, so you’ll want to plan these out carefully.

Everyone knows that IRAs are a great way to save for retirement, but the potential to protect against creditors is another valuable aspect of these accounts. Is the same protection extended to beneficiaries? This article from Forbes, “Estate Planning Tip: Creditor Protection for IRAs & Beneficiaries,” explains in detail how these rules apply to various bankruptcy situations and the issues to consider when naming your IRA beneficiaries.

Bankruptcy. Similar to the protection offered to pensions, 401(k)s and Social Security benefits, IRAs can be protected from creditors in bankruptcy. If you declare bankruptcy, your IRA assets will typically be safeguarded and can’t be taken. However, this doesn’t extend to other types of judgments, civil lawsuits, or IRS levies. State laws will vary, but your IRA assets may be protected from other creditors. There is a $1 million inflation-adjusted limit that applies to federal bankruptcy protection rules for the aggregate value of Contributory and Roth IRAs (with inflation, the limit is $1,283,025 as of April 1, 2016). Assets rolled over to an IRA from a qualified plan, like a 401(k), aren’t subject to the same dollar limits and can be fully protected.

Beneficiaries Protection. A big benefit to IRAs is the simplicity in selecting a beneficiary to receive the money when you die. This can be a great estate planning tool because these assets are not subject to probate and pass directly to the beneficiary. Make sure that your beneficiary designations line up with your overall estate planning goals. However, beneficiaries of IRAs are not always given the same creditor protection as the original account owner, so you need to consider this when selecting your IRA beneficiary.

An inherited IRA for a non-spouse beneficiary is no longer automatically protected from creditor’s claims when the beneficiary files for bankruptcy. When the owner dies, and the non-spouse beneficiary takes ownership of the account, the assets are no longer deemed retirement funds, and can be seized in bankruptcy. This only applies to non-spouse beneficiaries because a spouse can roll over inherited IRA assets into his or her own account. When this transfer occurs to a surviving spouse, the assets are once again protected. However, a non-spouse beneficiary can’t comingle inherited IRA assets with their own retirement assets. Check your state laws on the degree of protection over non-spousal inherited retirement funds.

Children as beneficiaries. Many parents opt for their children to be beneficiaries of their IRA accounts. This can be an issue if the children have financial issues or face debt collectors. You can get around this be creating a conduit trust, and by listing the trust as beneficiary of the IRA and not the child. As a result, an inherited IRA payable to a trust can be protected from the child’s creditors while still allowing the child to benefit from the inheritance. The IRA’s required minimum distributions are calculated on the trust beneficiary’s life expectancy, and income is taxed at the beneficiary’s tax rate. Since the assets aren’t legally owned by the beneficiary, they’re protected from creditors in most instances. However, keep in mind that once the income is paid out to the beneficiary, that income isn’t protected.

Like so many other estate plans, IRA beneficiaries should be reviewed regularly. Your own goals may change, and your beneficiaries will also experience changes in their lives. If a child is going through a divorce, for instance, you may want to work with a qualified estate planning attorney to find a way to protect your legacy and your child. Your state’s laws on creditor protection may change, as may tax laws. A regular review with an estate planning attorney is a worthwhile investment.

Reference: Forbes (December 9, 2016) “Estate Planning Tip: Creditor Protection for IRAs & Beneficiaries”

Holden & Campbell - Annapolis Estate Planning Attorneys

Maybe the Biggest "OOPS!" In Estate Planning – Annapolis Estate Planning

We can't say it often enough: make sure to update your beneficiary designations. Even if you never get divorced or have children, you should still check those designations every few years.

Updating beneficiary designations is usually the simplest part of estate planning, but it's also the most likely part of estate planning to be overlooked. You have beneficiaries on pretty much every account, from 401(k)s to life insurance policies. Do you know who your beneficiaries are?

USA Today says that it's not just because many of us have the majority of our assets tied up in products like these. The article, "Your ex could get rich if you don't update your beneficiaries," explains that it's also because beneficiary designations on a 401(k) or IRA are legally binding and often take precedent over anything in your will. This can lead to some serious unpleasantries if your beneficiary information isn't updated.

Many times a person who has worked at the same company for 20 years has a beneficiary designation that they set up on their first day of work, and they never think about it again. However, their lives are rarely the same fifteen or twenty years down the line. For example, they might be divorced and remarried, or they might have children or grandchildren who weren't even a twinkle in someone's eyes way back then. Leaving an estate to an ex-spouse or disinheriting your own children is not a rare event when people don't update their beneficiary designations.

Even if family circumstances are friendly, when that money passes to someone else, they can't just give it back. The IRS allows gifts of under $14,000 tax-free annually, but anything over that is going to be subject to taxation.

Always remember that the beneficiary designation trumps a will. You can avoid a lot of trouble (and fees!) if you approach beneficiary designations the right way. One trick to avoid taxes as long as possible is to skip a generation with a tax-deferred retirement account like a 401(k) or IRA that you leave to your grandkids instead of your kids. Once you reach age 70½, you'll have to withdraw money from these accounts, but leaving the cash directly to a younger family member allows them to keep it growing tax-free for a few more decades.

Think about your accounts and how you'd want them to be passed on to your family, instead of leaving inheritance up to chance. Part of this is reviewing your beneficiary information regularly.

Many accounts allow you to designate beneficiaries with a simple online form, so you can ensure the orderly transfer of wealth in just a few minutes. Some others may take more time to update, but you'll be glad you did it—and so will your heirs!

Here are some common events triggering a need to update beneficiary designations:

• Marriage or divorce;
• Birth of a child or grandchild;
• Death of a previous beneficiary; and
• When a minor beneficiary comes of legal age to inherit.

Here are some of the financial products that are most likely to designate a beneficiary:

• CDs, checking accounts or other bank accounts;
• Life insurance;
• Retirement accounts (401(k) or IRA);
• Some stocks, bonds, and mutual funds.
• Pension plans;
• Annuities with a death benefit;
• Corporate profit-sharing plans; and
• 529 college saving plans;

Reference: USA Today (January 14, 2016) "Your ex could get rich if you don't update your beneficiaries"

Holden & Campbell – Annapolis, Maryland Estate Planning Attorneys

Is an IRA Trust for You? - Annapolis Estate Planning

An IRA Trust can be a very valuable tool in certain circumstances. Unfortunately though, many people are unaware of the IRA trust and its benefits.

Trusts are only for the super wealthy, right? Wrong!

The Kokomo Perspective recently posted an article titled “Are You Trustworthy?” The article explains that due to all the recent rule and distribution changes to IRAs and other retirement accounts, the IRA Trust has become much more popular and effective. An IRA Trust is a special type of revocable living trust that’s designed to receive your IRA accounts for the benefit of your loved ones after you pass away. The IRA Trust offers both protection and control.

The original article explains that an IRA is frequently one of the largest assets passed on to beneficiaries. However, as we hear about in the news, the inheritance of large sums of money by children or other heirs unable to handle wealth can cause many problems. The U.S. Supreme Court held last year that inherited IRAs are not protected from bankruptcy, so many individuals worry about losing an inherited IRA to creditors, divorce, taxes, or reckless spending. These concerns have sent many IRA owners searching for a better way to protect this money for their heirs.

Talk with an experienced estate planning attorney about the IRA trust and its benefits. See if this tool will work for your situation.

Reference: Kokomo Perspective (March 29, 2015) “Are You Trustworthy?”

Holden & Campbell - Annapolis, Maryland Estate Planning Attorneys

Leave Your Legacy through a Roth IRA - Annapolis Estate Planning

Roth IRAs intrinsically make phenomenal transfer of wealth vehicles. With reduced estate taxes and no income tax for heirs to pay on withdrawals, establishing a Roth IRA or even converting to one from a Traditional IRA seems to be a simple decision. Just know what you are doing ahead of time.

When planning your estate, keeping all parties in mind is important. So it is with Roth IRAs.

A recent Benzinga article, titled “Legacy And Estate Planning With A Roth IRA,” says you should think about not only the account holder's tax situation, but the heir’s as well and consider the tax burdens your heirs may inherit.

The article recommend converting to a Roth when the estate owner's standard of living seems secure without the IRA. When an IRA is more of an emergency fund and a wealth-transferring vehicle, the objective is to try to ensure the maximum after-tax wealth for heirs. Only when this happens does the objective shift from personal security to the security of future generations.

Along with this, know that IRAs are controlled by regulations to ensure that the account contents are properly accounted for and the taxes paid. Inherited retirement accounts fall under a different set of regulations after the original account holder passes away. Even though the basic differences between Roth IRAs and Traditional IRAs remain, it’s critical to know that second-generation accounts are not treated exactly the same as first-generation accounts. Coupled with this is the fact that not all Traditional IRAs or all Roth IRAs are identical. As a result, you need to understand the specific regulations of your individual account. You can’t just rely on these typical situations described. So individual results may vary!

The most important thing to remember when planning your financial future, according to the original article, is that the more you know and understand regarding your particular financial situation, the better informed your decision-making process becomes.

Take the time now to invest in yourself and take ownership of your financial health.

Reference: Benzinga (January 30, 2015) “Legacy And Estate Planning With A Roth IRA”

Holden Campbell, LLC - Annapolis, Maryland Estate Planning Attorneys

When DIY Estate Planning Goes Wrong - Annapolis Estate Planning

People have many options today for creating their own estate planning documents. Forms can be purchased quickly from websites and books. However, trying to create your own estate plan can actually be more expensive than hiring an attorney.

 

Everyone knows that attorneys can be expensive. This is just as true for estate planning attorneys as it is for other types of attorneys. An entire industry has sprung up to give consumers a cheaper option for some supposedly routine legal matters, like estate plans. Forms are available for downloading online that promise buyers they just need to read the instructions and fill in the blanks to create their own wills and trusts.

 

One major problem with these services is when estate planning is not done properly it is much more expensive to fix things than it would have been to hire an attorney to do things right in the first place.

 

Recently, the Record-Bee published a story with some examples of what has gone wrong with these downloadable estate plans. The article is appropriately titled "Your Legacy and Peace of Mind: The pitfalls of do-it-yourself estate planning."

 

If you are considering making your own estate plan, take some time to read the stories in the article. Hopefully, that will inspire you to go ahead and visit an estate planning attorney to make sure that you do not make mistakes doing things on your own.

 

Reference: Record-Bee (January 20, 2015) "Your Legacy and Peace of Mind: The pitfalls of do-it-yourself estate planning."

Holden Campbell, LLC - Annapolis, Maryland Estate Planning Attorneys

Financial Facelift for 2015 - Annapolis Estate Planning

Here are seven things you can do this month to positively impact your finances all year.

 

Want to start the New Year off right when it comes to your finances? The Las Vegas Review-Journal article, titled “7 ways to give your finances a facelift in January,”cites some things you can do this month to positively impact your finances all year.

 

Establish an estate plan. If you have a spouse, kids, elderly parents—if you own your own home, a savings account, or investments—you should have an estate plan. Estate planning will save your loved ones additional strain at a difficult time, and ensure your wishes are carried out after you pass away.

 

Rebalance your portfolio. If you haven’t looked at your investments and/or retirement accounts lately, you should rebalance them at the beginning of the year. Your portfolios have varying investments in different asset classes. Over time, the market value of each investment earns a different return. This shifts the weight or the proportion of each investment. For example, if a certain fund does really well and second performs poorly, a once 50-50 split will teeter-totter to 80-20 or a percentage that is now not what you’d like to see. Shift the weight to keep your risk low and maximize your returns.

 

Use tax-advantaged accounts. Take advantage of the numerous tax-advantaged accounts available, such as a 401(k), IRA, and Health Savings Account. These types of accounts let you enjoy tax-deferred or tax-free growth of your money, which means significant savings over time. What’s more, sometimes, pre-tax contributions can lower your taxable income.

 

Consult an experienced estate planning attorney to help you get 2015 off to a great start!

 

Reference: Las Vegas Review-Journal (January 12, 2015) “7 ways to give your finances a facelift in January”

Holden Campbell, LLC - Annapolis, Maryland Estate Planning Attorneys

Are You Really in Control of Your Business? - Annapolis Estate Planning

Many business owners fear losing control. Before they’re willing to address exit or estate planning options, they must first be assured of complete dominion over their business. So let’s look at how to lock in ownership.

 

Are you worried about losing control of your business?

 A recent Forbes article, “Control Freaks Take Heart: How To Maintain Control Of Your Business,” offers some ways to assure firm control of a closely-held company.

 Take stock. Business owners can frequently breeze over legal decisions involved in incorporating their business, which can have lasting ramifications.

 These decisions are critical in determining who is in control and over which aspect of the enterprise. One common way to share stock ownership without sacrificing control is by issuing non-voting stock. This gives individuals an equity interest in the business without voting rights as to the governance of the business. This can work with an S Corp, provided the stock rights are otherwise the same.

 Close counts. Many states have corporate laws for closely-held companies, but many of these laws only apply if specifically provided for in the company’s articles of incorporation, bylaws, or other legal documents.

 These provisions are good to consider and also may help lock in control. The original article provides some examples of closely-held corporation laws that can potentially impact shareholder control, to include:

• Permission to dispense with the annual Board of Directors meeting
• Allowing voting trusts
• Requiring straight voting versus cumulative voting
• Mandating that major corporate actions can only be undertaken with approval of a super majority of stockholders

 Depending on how ownership of a closely-held business is set up, these types of terms allow owners a bit more control—both in running the business and determining future.

 Rent versus own. Simply stated, if you want total control of the business as an owner, don’t give away stock. Stock options, in essence, are just delayed ownership of stock, and restricted or non-voting stock still entitles owners to demand corporate information and allow them to file derivative lawsuits.

 If you want a key employee to share in the wealth of the company, but not in the direction of the business, the original article suggests that you use other incentives than stock. It gives the example of nonqualified deferred compensation arrangements like phantom stock and stock appreciation rights (SARs) that can mimic stock value without giving up the stock itself. Better yet, create a nonqualified plan that has defined metrics to target the desired behavior of key employees such as where: (i) the sales VP shares in a part of the sales success; and (ii) the CFO shares in a piece of the profit; however, (iii) neither share in the control. If you do this, then the business owner is “renting” the company’s success to fund incentives but isn’t giving up ownership.

 Before taking any of the actions described in the Forbes article, consult an experienced estate planning attorney.

 Reference: Forbes (December 22, 2014) “Control Freaks Take Heart: How To Maintain Control Of Your Business”

 

New Year, New Financial Goals - Annapolis Estate Planning

If history is a guide, this coming week nearly half of us will make resolutions seeking to improve some facet of our lives, many of which will be focused on personal finance. If one of your goals for the New Year is to get your financial life in order, here are a few key areas which should be included on your 2015 financial planning checklist. 

As you begin compiling your 2015 financial goals, one of the first items on your list should be to calculate how much money you'll need in retirement. It’s one of the most significant math problems you’ll do after you finish grade school. Once you have arrived at the answer to this math problem, you need to examine if that answer will create a problem for you as you prepare for retirement.

 

With that target in place, pay heed to the advice in an article from Seacoastonline.com titled “Start your 2015 financial planning checklist.” Consequently, you should create a strategy that will help you achieve that goal. A savings plan is one method you can use—and take maximum advantage of any tax-deferred savings opportunities available to you along the way.

For instance, if your company has a 401(k) plan—especially where they match your contributions—it’s imperative that you defer as much of your pay as possible to this account to enhance your retirement security. That’s free money that your employer is setting aside for you just for being smart and planning for retirement!

In 2015, the 401(k) contribution limit is at $18,000. If you are age 50 and older, you can enjoy an additional $6,000 catch-up contribution.

If your employer doesn’t have a 401(k) program, then you should start and contribute to a traditional IRA. You can put in $5,500 pre-tax ($6,500 for those age 50 and older). Alternately, you can contribute to a Roth IRA, which, for 2015, has the same limits.

Eligibility to make Roth contributions, however, starts to phase out as your modified adjusted gross income exceeds $183,000 for married couples and $116,000 for single tax filers. The article suggests that, to maximize growth potential, it's typical to make traditional and Roth IRA contributions early in the year, instead of waiting until the contribution deadline (April 15^th of the next year).

Take a look at your insurance coverage and make sure that your financial plan is not derailed by an unforeseen disability or untimely death. Acquire adequate long-term disability insurance so you will have income to pay expenses and to fund other goals. Although many employers offer group disability and life insurance coverage at a low cost, that coverage may not be sufficient. Supplement this with individual coverage to provide adequate security for you and your family.

Last, but certainly not least, your 2015 checklist should include setting up and maintaining a complete, up-to-date, estate plan with an experienced estate planning attorney.  As one of the most neglected areas of personal finance, you should have, at a minimum: (i) a will to designate beneficiaries for your assets (ii) a durable power of attorney to designate an agent to act on your behalf in financial dealings; and (iii) a health care proxy to designate an individual to act for you when health care decisions are required. You should also discuss a living will with your attorney so that you can make your wishes known for life-prolonging treatments you want or don’t want.

In addition, trusts can play an important part in an estate plan. A revocable trust can simplify estate settlement for family members: it isn’t part of the probate process and provides for ongoing management of your financial resources in the event you become incapacitated.

 Reference: Seacoastonline.com (December 28, 2014) “Start your 2015 financial planning checklist”

Holden Campbell, LLC - Annapolis, Maryland Estate Planning Attorneys

Estate Planning Tips from Santa: Make a List and Check It Twice! - Annapolis Estate Planning

Yes, nobody relishes thinking about the day when they will no longer be around. But with a little effort and foresight, you can give your family the ultimate gift: a piece of mind. Here's a quick checklist of estate planning essentials.

Not really ready for an estate planning talk around the fire this holiday season? It's definitely not a pleasant conversation when considering the end of one's life. Yet, if you could give your family the gift of "peace of mind", would you? Probably so. What does this gift look like?

The Street’s recent article, “The best holiday gift for your family: estate planning,” gives us a quick checklist of estate planning essentials:

Wills and Trusts. These legal documents state how you'd like to distribute your estate after you are gone. You can also appoint a legal guardian if you have minor children. Without a legal will that’s up-to-date, your assets might be divided by the probate court according to state law, rather than how you would want. Dying “intestate” can create problems for your heirs, and it can be a long and expensive process.

Living Trusts. Some people prefer creating a living trust. A living trust is a legal document that places your assets into the trust for administration during your lifetime. You can name yourself as the trustee and even appoint someone else in the event you become incapacitated. When you die, the assets are transferred to your beneficiaries as you provide. The great thing about a living trust is that it is much more difficult to challenge by a claim on your wealth. Also, a living trust isn’t a public record, so your privacy is protected, and your wealth can be divided up without state oversight.

Living Wills. If you become seriously ill and are unable to make decisions for yourself at the end of your life, you will be glad you have a living will. This, along with a health care directive and power of attorney, will make sure your medical care is as you wish.

Durable Power of Attorney. Estate planning attorneys will advise you to have a trusted individual who can handle your finances and property if are disabled and are unable to take care of your own affairs. 

Life Insurance. If you own a home with a substantial mortgage and have young kids, you want to make sure you have enough life insurance to pay for their educational expenses.

Crucial documents. The original article also advises that you make sure your spouse, family, and estate planning attorney know the location of the documents they need to execute your estate according to your wishes.

So be jolly this holiday season, and take these important, practical steps to make sure your estate passes easily to the next generation when needed.

Reference: The Street (December 4, 2014) “The best holiday gift for your family: estate planning”

Holden Campbell, LLC - Annapolis, Maryland Estate Planning Attorneys