Blog Series: Five Easily Avoided Estate Planning Mistakes

Posted on by in Estate Planning, Tax Law.

Estate planning mistakes are made all the time and usually this is because the financial advisor/accountant/attorney has overlooked important issues. We have chosen to highlight five very common mistakes in this blog series.  All of these mistakes are easy to avoid, as long as you and your trusted advisors know how to recognize them!

It is important to also consult with an attorney in your State in order to review whether or not these issues pertain to you. In any case, it is recommended to ask your estate planning attorney what the most common mistakes they encounter on a regular basis are, and bring up these issues with them for discussion.

Mistake 2 – Believing that having a will avoids probate.

Not true!  Having a will does not mean you don’t have to go through probate!  A will only directs your estate where you desire; in most cases probate is still required when the only estate planning tool is a will.

A big part of estate planning is deciding whether or not you should take steps to avoid probate.  Probate is not necessarily a bad thing, and depends on many factors including the size and set up of your estate and the State in which you reside. In many cases, people choose to avoid probate as it is appropriate for their estate and there are usually legal fees and a significant amount of time required to go through the probate process.

The two most common ways to avoid probate are holding title as joint tenants and holding title in the name of a trust. It is also important to note that in most cases, beneficiaries of life insurance policies, retirement accounts, and annuities, are also not subject to probate.

This is only one common mistake.  Again, please make sure that you consult a competent estate planning attorney to make sure everything in your estate is in order and fits perfectly with your individual situation!

Copyright © MD Producer

Blog Series: Five Easily Avoided Estate Planning Mistakes

Posted on by in Estate Planning.

Estate planning mistakes are made all the time and usually this is because the financial advisor/accountant/attorney has overlooked important issues. We have chosen to highlight five very common mistakes in this blog series.  All of these mistakes are easy to avoid, as long as you and your trusted advisors know how to recognize them!

It is important to also consult with an attorney in your State in order to review whether or not these issues pertain to you. In any case, it is recommended to ask your estate planning attorney what the most common mistakes they encounter on a regular basis are, and bring up these issues with them for discussion.

Mistake 1 – Not having an estate plan.

Many people believe that as long as they hold title as joint tenants that this is all that is necessary. As we know, one of the major issues in many States is to avoid probate. This will obviously vary depending upon your estate, but in most cases, it is a lengthy process to go through probate and often it is wise to avoid it.

Holding title as joint tenants usually avoids probate – but only upon the first death! If, for example, a married couple holds title as joint tenants, and the husband passed away, then the wife would automatically inherit his half. However, in the event that they had three children, and the mother passed away, the children would usually have to go through probate in order to transfer the title of that asset over to them.

I know some advisors recommend their clients to put their children on as joint owners after the husband would pass away. However, this is also a potential problem due to step-up in basis considerations, and very often, liability or control issues!

This is only one of the various common mistakes.  Again, please make sure that you consult a competent estate planning attorney to make sure everything in your estate is in order and fits perfectly with your individual situation!

Copyright © MD Producer

Mistake 9: Waiting until the last minute to make changes on the IRA.

Posted on by in Estate Planning, IRAs, Tax Law.

Many advisors think that the IRA custodian will act promptly when dealing with these matters.  However, many of these custodians are not familiar with all of these new rules and tax laws and will consider them an “exception.” They will often run these “special cases” through their legal department and it often takes a lot longer than you might think in order to finalize all of the paperwork. It often takes three months or longer for the IRA custodian to transfer the accounts and get everything retitled properly. This is especially true if you have multiple IRA accounts. Therefore, it is wise to make the decisions and final changes regarding the splitting of the IRA as soon as possible after the person passes away in order to give the  IRA custodian enough time to process all this paperwork.

Mistake 7: Not establishing the Inherited IRA properly.

Posted on by in Estate Planning, IRAs, Tax Law, The Lange Money Hour.

There are a number of rules that must be met in order to properly establish an Inherited IRA:

  1. Notification must be made to the custodian in writing.
  2. The first minimum distribution must be taken no later than December 31st of the year following the year the person passes away. Note: if the decedent was receiving lifetime RMDs, the beneficiaries must ensure the RMD has been taken for the year of death.
  3. The IRA must be retitled properly showing the following information (something that Jim has covered on the radio show more than once, due to the number of times mistakes are made on this key point):
    1. The decedent’s name, with “deceased” or “decedent” after the name.
    2. It must show that it is still an IRA.
  4. Retitling must be done by December 31st  after the year of death.

If these requirements are not met, then most beneficiaries will be faced with the following consequences:

  1. If the orginal account owner was RMD age or older, the IRA must be distributed over the owner’s remaining life expectancy, based on the single life table.
  2. If the orginal owner was under RMD age, the entire IRA account must be distributed no later than December 31st of the fifth year after the person passed away.
  3. If the account title is not worded properly the entire account could also be subject to immediate taxation all in one year!

Make sure you discuss all the vaious laws and titling issues with your advisor when establishing an inherited IRA.

Information adapted from MD Producer material

 

Mistake 4: Immediately rolling over the money from the decedent’s IRA over to the spouse’s IRA.

Posted on by in Beneficiary Designations, Estate Planning, IRAs, Tax Law.

This is not usually a good idea until the entire finances of the deceased and the beneficiaries are reviewed in detail. I always recommend contacting the client’s CPA and estate attorney in order to determine whether or not there are going to be any estate tax issues. For example, it is possible that the surviving spouse would actually want to disclaim some or all of the IRA in order to reduce any unnecessary estate taxes.

In addition to this, if you roll over your spouse’s money into your name and you are under age 59 ½, you may have to pay a penalty if you need to take a distribution before you turn 59 ½. This is called the “Spousal Rollover Trap.”

One of the options you could take in these circumstances is to utilize section 72(t) of the Internal Revenue code and take out the money before age 59 ½ without paying a penalty by using “substantially equal payments.” However, if you are many years away from this date and if you leave money in the decedent’s IRA, then you can take out money from the decedent’s IRA without any restrictions at all!

As you can see, a surviving spouse must be careful to investigate all options before rolling over the decedent’s IRA into their own name.

 

Adapted from MD Producer Materials

Mistake 3: Having too many IRA custodians.

Posted on by in Estate Planning, IRAs, Tax Law.

You should try to limit the number of custodians because each IRA custodian is different and in order for you to remain current on the new rules and regulations, you must remember that each of the IRA custodians may or may not be current on all the tax laws. The more custodians that you have, the more work you will have to do in order to determine whether or not they are up-to-date.

Imagine if you have 10 IRA custodians, you would have to review 10 different custodial accounts and keep current on each of these changes as the IRA custodians make them!

Many IRA custodians may not allow you to implement your desired plan. If they are not flexible, then it is time to switch. Many beneficiaries are not aware that they do not necessarily have to put up with the prior owner’s custodian. The IRA can usually be transferred from one custodian to another IRA custodian without any tax consequences.

 

Adapted from MD Producer

Mistake 1: Not seeing a qualified tax or financial advisor before making your decision

Posted on by in Estate Planning, IRAs, Tax Law.

Unfortunately, many beneficiaries do not seek a qualified tax or financial advisor and make retirement account decisions on their own or through the use of an unqualified individual or company.

There are a number of different rules that must be followed in order to prevent the IRS from being a primary beneficiary of your retirement account.

Your financial advisor should be competent in all of the different areas of financial planning, especially estate planning, income tax planning and retirement distributions. Please also remember that they should determine whether or not there is any estate tax due on the IRA account. Unfortunately, many people confuse “probate” with estate taxes. Retirement distributions will usually avoid probate, but are always subject to estate taxes. Therefore, please make sure that your advisor reviews this issue as well.

Many advisors may have heard of the Inherited IRA; however, many financial advisors have never established one before! Please ask your advisor/custodian how many Inherited IRAs they have established in the past because if this is the first time they have established one, we all know what happens the first time we do anything! It is called the learning curve. Many of the mistakes that I see are because the financial advisor is not familiar with all of the details and, unfortunately, the client is the “guinea pig.”

Remember the old expression, “We have theory, and then we have the real world.” Please make sure that your advisor understands the “real world.”

Be careful in choosing a custodian. It is often very difficult for custodians to keep up on all the new tax law changes and apply these to their custodial accounts because this is not usually a major priority since the profits on IRA account fees for many custodians is minimal or non-existent.

Your tax or financial advisor should also review your total financial picture before any decision is made because this inheritance can affect your current financial affairs. The financial advisor should review the impact of this inheritance in the following areas:

  1. Income taxes.
  2. Estate plan. You might not have had a large estate and now you do! You might need to have your will or trust updated due to this inheritance.
  3. Estate taxes.
  4. Investments. Your risk tolerance level could be significantly different from that of the individual who just passed away. Please check each of your investments to determine whether or not they are still appropriate.  In most cases you will be able to reposition these assets within the IRA without any income tax consequence.
  5. Cash flow needs. It is very possible that you do not need the entire IRA balance all at once.

Talking through these points with your advisor will help you avoid some of the most common mistakes of inherited IRAs.

 

Material Adapted from MD Producer

Answers to The 70 1/2 Quiz!

Posted on by in 401(k), Estate Planning, Income Tax, IRAs, Tax Law.

Yesterday we tested your knowledge of the tax laws surrounding Required Minimum Distributions…  Let’s see how you did! 

  • 1 D: April 1, after the year that you turn 70 1/2. For example, if you turn 70 1/2. in the year 2005, the required beginning date would be April 1, 2006.
  • 2 Usually not.Let me explain. The year that you turn age 70 ? is often referred to as your required beginning year. You must take out a distribution for this year, but the government says that you have until April 1 of the following year before you need to actually take the money out.. Taking your beginning year distribution in the following year does not relieve you of the obligation to take a required distribution in that year, however. Thus, by waiting you will have to take two distributions in the following year-a delayed distribution from the beginning year and another for the current year!Why is this bad? Let us assume that your minimum distribution for the year 2005 was $15,000 and that you wait until March 31, 2006 to actually take out this amount. The $15,000 is treated as a distribution for the 2006 tax year.However, you also must take a minimum distribution for the year 2006, for which the deadline is December 31, 2006. If we assume that your minimum distribution for the year 2006 is $18,000, then your total distribution would be $33,000 in one calendar year! This might push you up into a higher tax bracket for 2006. Thus, in most cases it is best to take your minimum distribution during the year that you turn age 70 ?, rather than waiting until April 1 of the following year. It is best to prepare a tax projection in order to determine which way is best for you, depending on your circumstances.
  • 3 C: A 50% penalty. For example, if your minimum distribution was $20,000 and you only took out $8,000, then the difference would be $12,000. The penalty would be 50% of $12,000, which equals $6,000! Talk about a penalty!
  • 4 E: You can name almost anything or anyone. For example, you can name your spouse, children, grandchildren, a trust, a charity, your estate, or even your dog!
  • 5 A: YES! Under prior law, if you designated a charity as a partial beneficiary, this would prohibit your spouse from rolling over the rest of the proceeds or any of the other beneficiaries from electing to take IRA distributions over their lifetime. However, under the new laws, the spouse would have the right to roll it over into her IRA even though the charity was one of the primary beneficiaries, as long as the charity took out its distributions.
  • 6 No.?The final regulations no longer take the beneficiary into consideration.! It makes no difference even if there is no beneficiary because the individual would still take out a minimum distribution based upon the new table. There is an exception, of course, if a spouse is the primary beneficiary and he or she is more than 10 years younger than the IRA owner. In such a case you can use a different table that has longer life expectancies. However, in this example, this is not an issue.
  • 7 Yes!?If the spouse is the primary beneficiary of the living trust and the trust is the primary beneficiary of the IRA, and the other conditions listed below are also satisfied, then the IRS allows you to “look through” the trust and treat the spouse as being the primary beneficiary of the IRA. The spouse then has the right to roll it over into his or her own IRA.The required conditions are as follows:?
    1. The beneficiary designation must be valid under applicable state law.
    2. It must be irrevocable or become irrevocable at your death. Revocable trusts become irrevocable when you pass away and therefore a revocable trust can now be the beneficiary.
    3. All beneficiaries of the trust must be individuals.
    4. The beneficiaries must be identifiable from the trust document.
    5. A copy of the trust or trust certification that identifies the beneficiaries in any subsequent revisions must be given to the plan administrator no later than December 31st of the year after the?person passes away.
  • 8 D:The child would have the right to use any of these options; however, the best choice in most cases would be to take the distributions over his or her lifetime. The election must be made no later than December 31 of the year following the year of death. This is usually by far the best option for most non-spouse beneficiaries because it permits the maximum deferral for taxpayers who do not really need the money, while providing an option to receive the full amount in one year or over a five-year period if desired…Unfortunately, many IRA custodians default to taking out the distribution over a shorter period of time unless an election is made to extend it. Many beneficiaries (and their advisors!) are not aware of this rule and forget to make any election, and therefore are subject to the default provisions that the IRA custodian has. It is extremely important to review your custodian’s language in order to determine what options that they allow after you die.
  • 9 E: It doesn’t matter anymore! There used to be a number of factors to take into consideration before making your choice on calculating your Required Minimum Distribution such as selecting life expectancy, the recalculation method, single vs. joint, hybrid, term certain, etc. There is now one uniform table that most people will use. This table generally assumes that the beneficiary is 10 years younger than the IRA owner. The only exception is a situation in which the beneficiary is a surviving spouse who is more than 10 years younger than the IRA owner. Under the facts of this question, the spouse is 67 years old. Although this is only three years younger than the IRA owner, you can still calculate your minimum distribution assuming he or she is 10 years younger.
  • 10 C:?You might be depleting your IRA principal, but the IRS does not require this. The IRS merely requires that you take out a minimum distribution based on the new table and whether IRA principal decreases in a given year depends on whether the required distribution exceeds the growth in asset value for that year.For example, let us assume that your spouse is your primary beneficiary and both of you are 70 years old. According to the IRS tables, you have a life expectancy of 26.2 years. Therefore, if you have $100,000 in your IRA at the end of the prior year, you would have to take a minimum distribution of $3,817, which is about 4% of the IRA balance. If your investments inside of your IRA earn more than 4% , then your IRA will actually grow! The following chart illustrates what happens to your IRA balance if IRA investments earned a 10% return.

    IRA beginning balance:?$100,000

    Earnings during year:?10,000

    Less required minimum distribution -3,817

    Ending IRA Balance?$106,183

    Obviously, if your minimum distribution is greater than the earnings on your IRA, however, then you will start depleting your principal.

Take the 70 1/2 Quiz!

Posted on by in Estate Planning, Income Tax, IRAs, Tax Law.

Many individuals with large IRAs understand that 70 1/2 is the magic age at which they have to start taking required minimum distributions. Unfortunately, these people often underestimate the complexity of the tax laws regarding this issue. Therefore, please take a few minutes to complete this 70 1/2 Quiz!

  1. At what date must you begin taking minimum distributions from your IRA?
    1. 70
    2. 70 1/2
    3. April 1 of the year you turn age 70 1/2
    4. April 1 of the year after you turn age 70 1/2
  2. Should you usually wait until this date before you take out your first minimum distribution?
    1. YES
    2. NO
  3. What is the penalty if you do not take out enough?
    1. 10%
    2. 25%
    3. 50%
    4. 75%
  4. Who can you name as beneficiaries to your retirement account?
    1. Spouse
    2. Children
    3. Grandchildren
    4. Pets
    5. Any or all of the above
  5. If I name my wife as 50% beneficiary, my son as 25% beneficiary, and a charity as 25% beneficiary, can my wife still roll over her interest into her own IRA after I am gone?
    1. Yes
    2. No, because the charity disqualifies the other beneficiaries from electing a rollover or an Inherited IRA.
  6. If I name my revocable trust as the primary beneficiary, am I required to take out my minimum distributions based on my single life expectancy?
    1. YES
    2. NO
    3. MAYBE
  7. If I name my trust as my primary beneficiary and my spouse is the primary beneficiary of my trust, will my spouse be allowed to roll over the proceeds into his or her IRA? [consistency]
    1. YES
    2. NO
  8. If I name a child as the primary beneficiary of the IRA, what options does he or she have with respect to minimum distributions after I die?
    1. within 1 year?
    2. within 5 years?
    3. over his/her lifetime?
    4. A, B or C
  9. I just turned age 70 1/2, am married and my spouse (age 67) is my beneficiary. What is my best choice for calculating my required minimum distributions?
    1. Recalculation?
    2. Term Certain?
    3. Hybrid
    4. Depends on circumstances
    5. Doesn’t matter
  10. Once I turn age 70 1/2, must I start depleting my IRA?
    1. Yes
    2. No
    3. Maybe

How do you think you did? On the average, most people get less than half correct!  Check in tomorrow for all the right answers!

To get the right answers for you, call us and schedule a Free Second Opinion with Jim Lange! 412-521-2732.

 

Quiz from MD Producer

Time is running out to lock in low rates on insurance premiums.

Posted on by in Estate Planning, Life Insurance.

The January 1, 2013 deadline is approaching fast and we are already seeing changes being made to permanent policy rates.  Revisions to actuarial guideline 38 are going to cause many premiums to skyrocket.  For more information visit our site www.paytaxeslater.com and check out all the resources we have available on insurance in the middle of the page.  We have had radio shows on the topic, and there is currently a transcript and mp3 available for download.  We also have posted an open letter to our clients and friends regarding this important issue, (which can be found directly at: https://www.paytaxeslater.com/articles/insurance_increase.pdf)

Take some time today to read and evaluate this information and then call us for a complimentary insurance review.  412-521-2732