Annapolis, Maryland Wills, Trusts & Estate Planning

Avoid Common Mistakes about Inherited IRAs - Annapolis Estate Planning

The rules about inherited IRAs are complex, and mistakes can be costly. These accounts need to be addressed for tax planning and in your estate plan.

Mistakes made with an inherited IRA can become very expensive, very quickly. A recent article in The Hampton Roads Business Journal, “You may be paying more tax on inherited IRA than required,” explains the basics.

IRAs are distributed differently than other assets, during life and after death. Your IRA beneficiaries may qualify for special tax breaks that are often overlooked. They can’t change ownership during life or be jointly owned. IRAs pass by contract generally, and not by a will.

IRAs may require their own estate plans, and those plans should be integrated within the overall estate plan. You should speak with your estate planning attorney about this.

As far as taxes are concerned, IRA investment gains may not be subject to the 3.8% investment income surtax and may be subject to double tax at death–both income and possibly estate tax.

For example, if you were to inherit an IRA from your father when he passes away and he has a taxable estate, as the beneficiary you may be entitled to a special deduction that can offset some of the otherwise-taxable distributions from that IRA. This deduction is easy to miss because two entities must coordinate their tax planning: (1) the settling estate and (2) the IRA beneficiary. It’s not common for these two to make a coordinated effort to realize all of the tax-saving opportunities.

The distributions from an inherited IRA are generally fully taxable to the beneficiary. You might be able to find shelter from that tax liability, which would be easier to catch before the inherited IRA begins to pay income. However, even if you’ve started to get income, you may still be entitled to take this deduction.

When an IRA owner dies, there are a few complex rules from the IRS with which you’re expected to comply. The 691(c) deduction for Income in Respect of a Decedent may be worth discussing with your estate planning attorney if you have inherited an IRA or think you may in the future. IRAs are very different when it comes to how they mesh with your existing plans and those of your heirs.

When it comes to retirement savings, IRAs are terrific, but their complexity requires the help of an experienced estate planning attorney. The goal is to pay less taxes, not more, and that takes understanding how the inherited IRA works,  as well as how it fits into your overall estate plan.

Reference: The Hampton Roads Business Journal (October 30, 2017) “You may be paying more tax on inherited IRA than required”

Holden & Campbell, LLC – Annapolis Estate Planning Attorneys

Get the 411 on Roth IRAs - Annapolis Estate Planning

These three questions merely scratch the surface of other factors that may need to be considered. Keep in mind that your estate at age 45 is likely very different from the one you’ll have at age 65 and 85 — your accounts change, you spend/inherit assets, and you gain/lose family members. The more complex your situation, the more you’ll benefit from working with a skilled financial adviser, tax specialist, and estate attorney.

If you are considering a Roth IRA, ask yourself these three questions:

1. Will your Roth outlive you? In estate planning, the top two reasons for Roth conversions are to bequeath tax-free assets and to reduce your taxable estate. It’s critical to project your spending lifestyle relative to your net worth to understand how your assets may be used in retirement. This allows you to see what assets are likely to be part of your remaining estate.

The MarketWatch article, "When a Roth conversion is right for your estate — and when it isn’t," explains that if you project you’ll spend all of your IRA assets in retirement, the decision to convert will be based on marginal tax rates over your lifetime. If you think your Roth will outlive you, make sure the conversion tax implications outweigh the long-term savings for the person who will inherit the account. If you throw the beneficiary into a higher tax bracket with the inheritance, he or she may be better off if you take the tax hit now at your lower tax rate. But if the beneficiary’s tax rate at the time of the inheritance will be lower than your current tax rate, conversion may not be worth it. Talk with your estate planning attorney about possibly leaving the assets in a traditional IRA.

2. Is there a plan to maximize the Roth benefit? If you plan well, the benefits of a Roth conversion could span multiple lifetimes, so it’s very important to communicate this to your spouse to extend the account’s tax-free growth.

3. Does your estate benefit a charity? Charities generally don’t pay any income taxes on donations, so a traditional IRA—rather than a Roth—is a terrific asset to leave to charity. When you own an IRA, it’s like you have a joint account with the U.S. Government, as taxes are owed on the money that’s distributed. However, when the account is transferred to charity, Uncle Sam doesn’t get anything. The charity gets it all! So, converting the IRA to a Roth and naming a charity as beneficiary would be a mistake by creating an unnecessary taxable event, a payable tax to the government, and would reduce the amount received by the charity.

These are just a few of the questions that can arise when talking about an IRA conversion. The more complex your circumstances, the more you’ll benefit from working with an experienced estate planning attorney.

Reference: MarketWatch (November 17, 2014) "When a Roth conversion is right for your estate — and when it isn’t"

Holden Campbell, LLC - Annapolis, Maryland Estate Planning Attorneys

It’s Never Too Soon To Be Savvy - Annapolis Estate Planning

Now is the time to adopt financial habits that determine a successful retirement,
even if you’re still in your 20s.

(Note: Parents, here is a great article to share with your twenty-something adult children!)

If you are a twenty-something, you have plenty of time to think about investing, right?

Even so, a recent article from U.S. News & World Report, titled "10 retirement moves for your 20s," confirms that this is your decade to create the financial habits that will work for you and help you have a comfortable retirement. The original article details some retirement strategies you can start now to develop those crucial financial habits.

Here is an overview before you click over to read the article yourself:

• Pay yourself first. This old adage is vital to be successful in your savings mentality, especially when you are a twenty-something. Opening a 401k through your employer is a great way to save. The nice thing about this is most everyone now has a payroll deduction option, so you can set aside a dollar amount or a percentage of your income straight to your retirement account every time you get paid. Since it is an automatic deposit of a relatively small amount, you likely will not miss it.
• Control spending. The less you spend, the more you can save. Makes sense, right? Now this does not mean you have to live like a starving artist (unless you are, indeed, an artist who is starving!), but you should be in the habit of spending less than you earn each month. An easy way to do this is to pay with cash! Credit cards are convenient, but they come with heavy interest charges and fees — as well as a relaxed, "No worries, I can pay later" attitude. Perhaps keep a card for emergencies, but know what you have in your wallet and in the bank.
• Eliminate debt. Did you know non-mortgage debt is one of the greatest impediments to retirement? Paying yourself first is hard to do if also have to pay credit cards, student loans, and your monthly car loan installment. Work on eliminating that debt now and focus on avoiding debt altogether.

Organizing your finances need not be complicated or time-consuming. Adopt a system for organizing digital and hard copies of financial information — there are plenty of software programs and applications on the web. These will save you time and help you analyze your spending habits.

Read more about these tips and others in the original article. Call your estate planning attorney with any questions. What estate planning attorney, you ask? Now is the time to talk to one. He or she will have the resources and relationships to help you get … and stay on track.

Reference: U.S. News & World Report (November 20, 2013) "10 retirement moves for your 20s"

Holden Campbell, LLC - Annapolis, Maryland Estate Planning Attorneys

Inheritance Planning For Grandchildren Using Roth IRAs - Annapolis Estate Planning

In most situations, you can leave your Roth IRA to anyone you please simply by designating them as beneficiary. While it is perfectly legal to leave retirement accounts to a minor, doing so can create some complications.

 

IRAs aren't just retirement tools, they are also significant tools for estate planning. This is especially true when it comes to Roth IRAs.

One specific application for Roth IRAs is in the context of inheritance planning for grandchildren. Unlike “regular IRAs,” there will be no future “income taxation” on withdrawals from Roth IRAs. MarketWatch recently explored this issue in a Q&A titled “How to leave your Roth IRA to a minor.”

Is it possible to leave a Roth IRA to grandchildren for educational purposes or, failing that, to a trust for their benefit? The short answer: yes. The Roth IRA (or other IRA) can be left as part of the inheritance simply by naming one or more individuals as the beneficiary or beneficiaries under the plan. In addition, you can name a trust as a beneficiary, thereby allowing a single IRA to either work overtime for a host of beneficiaries or to more carefully manage it.

Of course there is a long answer to this question, too. Naming a minor as a direct beneficiary to an account will require a legal guardian, which is a court-appointed role. Problem: the legal guardian appointed may not be the person you would have selected. Moreover, the IRA will not be skirting the court system as you may have intended by passing free of the courthouse.

Arguably, naming the trust as beneficiary does require the expense and thoughtfulness of establishing a trust, but the benefits typically far exceed getting caught in the legal red tape of the probate court.

Essentially, IRAs are unique assets and giving to minors always involves a bit of a challenge in and of itself. However, since IRAs are some of the most commonly owned assets, it makes good sense to plan for their efficient administration after you are gone.

So, how does your Roth IRA (or other IRA) currently fit into your estate plan?

Reference: MarketWatch (September 20, 2013) “How to leave your Roth IRA to a minor”

                Holden & Campbell, LLC - Annapolis, Maryland Estate Planning Attorneys

Versatility of Roth IRAs - Annapolis Estate Planning

Use this versatile account to get tax-free income and a whole lot more.

If you are used to a traditional IRA, the Roth IRA may seem peculiar at first when it comes to retirement accounts. So here’s a brief refresher on all the perks of the esteemed Roth IRA.

A recent Kiplinger’s article, titled “Why You Should Open a Roth IRA,” makes the case for understanding this savvy retirement tool.

Essentially, the Roth IRA is the inverse of the regular, plain-vanilla IRA. The latter is all about taxation, which is deferred until the time you take distributions voluntarily or involuntarily when you are required to take “Required Minimum Distributions” (RMDs).

Conversely, Roth IRAs make you pay the tax upfront, but then let them grow without taxation thereafter. In fact, after this upfront tax on the initial investment, no income taxes will be owed thereafter.

Roth IRAs offer a very specific benefit when it comes to estate planning. Clearly, eliminating those pesky RMDs and future income taxation altogether can help you preserve assets for yourself now and your heirs later.

Reference: Kiplinger (September edition, 2013) “Why You Should Open a Roth IRA”

                                        Holden & Campbell, LLC - Annapolis Estate Planning Attorneys

Annapolis Estate Planning: A Beneficiary Blunder: Can Your Ex-Spouse Inherit Your Life Insurance?

Words to the wise: keep beneficiary forms up to date. To change a beneficiary — for example, if you get married or divorced or your spouse dies — make sure to file an amended form. Even if your state has a law designed to cover oversights (or procrastination), you can’t always count on it to work.

While an up-to-date beneficiary form avoids uncertainty and probate, and oftentimes taxation, an out-of-date beneficiary form can induce controversy and distress. This teaching point was outlined in Hillman v. Maretta, a very recent case on beneficiary forms and the disaster that went all the way to the Supreme Court.

The case is considered in a recent Forbes article titled [spoiler alert] “Supreme Court Favors Ex-Wife Over Widow In Battle For Life Insurance Proceeds.”

You see, Warren Hillman left a life insurance policy behind amongst his other assets. Much of the estate simply passed to his then-current wife. Unfortunately for the current Mrs. Hillman, the life insurance policy was subject to a beneficiary designation form that still named his previous Mrs. Hillman, Judy Maretta. Judy and Warren had been divorced for some 10 years.

Despite the pleas of the current Mrs. Hillman, the court had to do it: they gave it all – every penny – to the ex-wife named as beneficiary.

Unlike a retirement account, the singular purpose of a life insurance policy is to provide financial protection to those depending on your life and income. This would seem to exclude a 10 years divorced spouse, absent an alimony requirement in the divorce decree.

Bottom line: the beneficiary form is a matter of contract between the policy owner and the insurance company. The courts can do nothing but enforce that contract.

Are your beneficiary forms ready to be followed to the letter? How will the rest of your estate keep out of the court system?

Reference: Forbes (June 3, 2013) “Supreme Court Favors Ex-Wife Over Widow In Battle For Life Insurance Proceeds”

Holden Campbell, LLC - Annapolis Estate Planning Attorneys

Annapolis Estate Planning Blog: Beware of Taxation on TSPs

 

Thrift Savings Plans (TSP) are defined contribution retirement accounts for federal government employees and service members.   The lesson of the article below is that any individual that inherits a TSP from his/her spouse should do a rollover of the TSP plan into an IRA.  The rollover should be completed as soon as possible after the death of the original TSP participant.  If the TSP is not rolled into an IRA, the entire TSP account must be immediately  liquidated and subject to income tax when the second spouse dies.  In the altenative, if the inherited TSP is rolled into an IRA, the children will be able to set up an inherited IRA and stretch the tax burden over their own life expectancy.  This article from govexec.com explains how one family's failure to roll the TSP into an IRA resulted in a $700,000 tax bill.  (FYI, when you click on the link, you may need to click on the top of the page on "go to govexec.com" to read the article.) 

                Holden & Campbell, LLC, Annapolis Estate Planning Attorneys