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Mar 26

Naming a Trust as Your IRA Beneficiary

By Jessica L. Estes

Most people with individual retirement accounts (“IRAs”) name their spouse and children as the primary and contingent beneficiaries, respectively, of their IRA. Or, if they are not married or do not have any children, their siblings and nieces or nephews. For the reasons outlined below, this may not be the best decision. Though, to understand why it may not be the best decision, it is important to understand the basics of IRAs and required minimum distributions (“RMD”). Generally, an owner’s funds in an IRA will be protected from his or her creditors, but a RMD will not be protected. A RMD is the distribution that must be taken starting at age 70 ½, which is based on one’s life expectancy. Once the distribution is made, that income is not protected unless state law provides otherwise. When the owner of the IRA dies, his or her beneficiary receives an inherited IRA.

In 2014, the U.S. Supreme Court’s decision in Clark v. Rameker sent shock waves through the legal and financial planning industries. The Court was asked to decide whether funds held in an inherited IRA were “retirement funds” within the meaning of the bankruptcy statute and thus, exempted from an individual’s bankruptcy estate. The Court answered this question with a resounding “no” and specifically held that funds in an inherited IRA are not “retirement funds,” rendering those funds available for payment to creditors. The Court reasoned that “retirement funds” are monies set aside for a day when one stops working; whereas, an inherited IRA consists of funds that may be used for immediate consumption. Prior to this decision, an inherited IRA was considered “retirement funds” and protected from the reach of one’s creditors. After this decision, though, that is not necessarily the case.

If one’s spouse inherits the IRA, they can: (1) create a new IRA in their name; (2) roll the inherited IRA into an existing IRA already in the spouse’s name; or (3) they can leave the inherited IRA in the deceased spouse’s name if the deceased spouse was younger than the surviving spouse so the payments can be stretched out for a longer period. If the spouse chooses option 1 or 2, the funds in the account will be protected; however, if the spouse chooses option 3, likely the funds would not be protected.

Moreover, if a child inherits the IRA, they could stretch out the RMD’s based on their life expectancy rather than their parent’s life expectancy, or the child could take the money all at once. Either way, though, the funds would not be protected from the child’s creditors, which may include a bankruptcy court, general creditors, lawsuits and judgments entered against them. Additionally, the Supreme Court decision opens the door for Medicaid to recover against an inherited IRA since the federal law allows recovery against beneficiary- designated accounts.

Another reason to name a trust as the beneficiary of your IRA is to protect government benefits for a spouse who may require or is currently receiving long-term care Medicaid benefits, or a disabled child receiving benefits. If those individuals were to inherit even a small IRA, it could disqualify them from continuing to receive benefits. Depending on the amount of the IRA, that may or may not matter, but one should be aware of the consequences of such action.

Similarly, if a designated beneficiary (1) is a spendthrift, (2) has a drug, alcohol or gambling addiction, or (3) has creditors, or any number of other issues, naming a trust could be beneficial to preserve the funds so it is not depleted quickly.

The trust must be drafted carefully so as not to trigger a five-year payout. If the Internal Revenue Service (“IRS”) considers the trust as the owner or beneficiary of the IRA, the trust must liquidate the IRA and distribute it within 5 years of the decedent’s death. However, the IRS will not consider a trust the owner or beneficiary of the IRA if four requirements are met: (1) the trust is irrevocable as of the decedent’s death; (2) the trust is valid under State law; (3) the trust identifies “human” beneficiaries; and (4) the trustee provides a copy of the trust to the plan administrator or custodian within 9 months of the date of death. If there is the possibility that a non-human can become a beneficiary (e.g. ultimate beneficiary is a church or charity), then the 5-year payout rule applies. As long as the above requirements are met, the trust will be considered a “see through” entity and any distributions paid to the beneficiary of the trust, will be taxed at that beneficiary’s income tax rate.

Also, the trust can be drafted in a way that maximizes the payout to the beneficiaries. Likewise, it is important to decide how the RMD’s payable to the trust will be handled. Giving the trustee the authority to decide whether to make distribution to the beneficiary or to continue to hold the RMD’s in trust provides more flexibility and creditor protection for the beneficiary. Depending on your situation, a trust might be the better choice for your IRA beneficiary designation.

Jan 29

How the Titling of Assets Could Have a Major Impact on Your Estate Plan

By: Jessica L. Estes

The one thing that can mess up even the best estate plan, is the titling of assets. I cannot tell you how many times a client will tell me they have the best trust or best will that encompasses everything from tax planning to creditor protection and disability planning for beneficiaries. For many of them, though, it does not matter how good their documents are if their assets are not titled appropriately.

Often, clients will add a child or other family member to their account so if something happens, that joint account holder can access the funds to pay bills. But what are the consequences of having a joint account holder? First, it is important to understand that a joint account holder is deemed to own 100% of that account, even if they never contribute any money to it. Not only does this mean they can withdraw all funds without your consent, but it also means that their financial power of attorney can control and/or access your funds. For example, if your son is joint on your bank account and he gets into a car accident and becomes disabled or requires long-term care, his power of attorney (likely, his spouse if he has one, or if he does not, a court-appointed guardian), might legally be required to use those funds for his benefit. Even if that does not occur, if your joint account holder files bankruptcy, gets divorced, or gets sued, that account could be garnished or liquidated. And, finally, when you die, that account will automatically pass to the joint account holder, who is under no legal obligation to distribute it in accordance with your will or trust. So, what good was that trust or will?

Similarly, if you name a beneficiary on your bank account – usually referred to as “pay on death” or “POD” – that account, upon your death, will automatically pass to your named beneficiary. Likewise, any beneficiary you designate on an investment account (“transfer of death”, or “TOD”) or a life insurance or annuity policy will also pass upon your death to your named beneficiary. In these situations, neither your will nor your trust will govern who gets your stuff.

Also, if you have an individual retirement account (“IRA”) with a beneficiary designated, that account will pass upon your death to your named beneficiary. This could cause any provision in your documents that would allow the beneficiary to stretch-out the payments from the IRA over their lifetime, to be ineffective and require the beneficiary to receive the all funds within five years of your death.

Moreover, if you have an account “in trust for” or “ITF,” that account belongs to the individual for which the funds are in trust. Because the funds in this account do not belong to you, this account will not be distributed in accordance with your will or trust. Rather, you should name a custodian to take over the management of the account upon your death.

And, if you have a trust, it does not mean your assets are now automatically in the trust. Your assets need to be retitled and the ownership changed to the trust. This will require action on your part to go to the bank or other financial institution and fill out change of ownership forms to have the account retitled in the name of the trust. If you fail to transfer the ownership of the assets to the trust, then the trust will not necessarily govern how the assets are distributed upon your death. Additionally, one of the benefits of a trust is to avoid probate, but if the assets are never transferred to the trust prior to your death, your beneficiaries will first need to go through probate.

So, review your assets and make sure they are titled in a way that is consistent with your estate plan.

Jan 22

How to Make Co-Parenting Successful

By: Valerie E. Anias

Figuring out how to co-parent after a break up, separation, or divorce is difficult. We especially see breakdowns in communication during the holidays. Now that the holidays are behind us, ERA Law Group, LLC want to help parents by identifying various resources available to help them Co-Parent.

Some parents find difficulty in communicating with one another. At times the communication is simple and other times, it is rather difficult. Nonetheless, both must parent their children. Removing face-to-face conversation is sometimes the best place to start when trying to co-parent effectively. The below programs and apps provide various resources for the separated and divorced parents.

Our Family Wizard

Our Family Wizard is an online program which provides a platform for communication. The parents can “email” back and forth, add items to a joint calendar, and, most importantly, if their dispute needs to be taken to Court, the correspondence can be tracked by the Court. This also serves as a means to encourage parents to speak with each other in a respectful manner and keep it about the children. There is an annual cost of approximately $100.00 per parent. This is a web-based program though there is an app for iOS and Android.

2Houses

Similar to Our Family Wizard, this program offers a mutual calendar, financial tab, and photo album tab. It does not allow for direct communication but there is a journal function which allows parents to make notes. The financial tab is particularly helpful as it outlines each parents expenses and each parent can upload what expenses they have paid on behalf of the child. There is no cost to this program. This is a web-based program though there is an app for iOS.

Kidganizer

Like the former two programs, this is also a means for both parents to keep information related to their children in one central location. It does not permit the parents a platform for direct communication such as Our Family Wizard, but there is an alert system to alert each parent regarding important events like doctor appointments or parent-teacher conferences. This is an iOS only app program and costs $1.99.

Custody Junction

Custody Junction provides a Scheduling Center which allows parents to schedule their visitation/events/vacations, etc. up to 2 years in advance. It also has a Tracking Center which allows parents to track when events were created, edited, amended, what the expenses were, who was present at each event, etc. It gets rid of the “he said, she said” regarding who, what, where, and when. Similar to 2Houses, it also has a Reporting Center which provides for accumulated expenses as well as reporting about child support payments, denied or forfeited parenting time, etc. This program is only web-based and costs $47.00 per parent for a 1 year subscription.

Appclose

AppClose is a combination of the above 4 programs. It has a joint calendar, a messenger option like texting, an expense forum that acts like Venmo by requesting reimbursement from the other parent as well as the ability to track expenses, the ability to create a parenting schedule, set important reminders, and keep track of family information such as immunizations, date of births, etc. Much like Facebook, it also has a NewsFeed function which displays all communications, events, etc. at a glance. This is a free app only program available for iOS and Android.

SKEDi

This program is a family calendar of sorts. It syncs your calendars so that each parent and/or child knows everyone’s schedule. It also has the capability of being shared with caregivers and babysitters if necessary. This is an iOS only app program and costs $9.99.

Co-parenting is key. The victim in parental miscommunication is the child. If you and your co-parent are suffering from severe communication breakdowns, contact our office at (410) 919-1790 and schedule your free 30-minute consultation.

Jan 15

DIY Estate Planning Documents: You Get What You Pay For

By Jessica L. Estes

Happy New Year! Now that the holidays are over, and things have settled down, it’s time to conquer those new year’s resolutions. Having a proper estate plan in place is one of the most important things you can do for your family. So, I hope you have at least considered, if not made, creating or updating your estate planning documents one of your resolutions. If you have, great! But, be careful. If you are considering the do-it-yourself (“DIY”) method, please don’t.

Have you ever heard the concept of fast, cheap, and good and that you can only pick two? Well, it’s true. Hiring an attorney to draft an effective estate plan will be one of two things: (1) fast and good, but not cheap; or (2) good and cheap(er), but not fast. And, if you draft the documents yourself, or complete a fill-in template online, it will be fast and cheap, but I guarantee those documents will not be good. In fact, the DIY method likely will cost you more in the long run than had you just hired an attorney from the beginning.

Even if you obtain documents through an online site that has attorneys who are licensed to practice in Maryland, it does not mean those attorneys keep up with the laws, as there is no continuing legal education requirement for attorneys in Maryland, or that their primary practice area is estate planning, as most of these online sites offer services in addition to estate planning.

Still, cost is a priority for most people. So, why pay a lawyer when you can get your estate documents online for free, or at a substantially reduced rate? There are three main reasons to use an attorney: (1) knowledge of the law, (2) knowledge of your goals and family situation, and (3) expertise to draft documents that accomplish your goals.

First, and foremost, an estate planning lawyer is licensed to practice law and focuses their practice on estate planning, specifically. As such, an estate planning attorney knows the law and can educate and advise you what documents best fit your goals and circumstances.

Second, an estate planning attorney will meet with you for an initial consultation usually lasting at least an hour and during which the attorney will discuss your estate planning goals and obtain personal, financial, health, and family information. They will get to know what is important to you and will then use this information to recommend a plan that accomplishes your goals and that is tailored to your specific situation. Additionally, you can ask questions and receive answers directly related to your unique circumstances. Online sites cannot accommodate this.

Third, an estate planning attorney will draft customized documents addressing your current situation as well as any concern or possibility that may arise in the future. For example, if you have a blended family, have a disabled beneficiary, or have an individual retirement account, etc., you should provide for these situations in your documents. Unfortunately, online sites have little, if any, room for customization. Rather, online sites provide basic documents that are generic and virtually the same for everyone.

Moreover, DIY estate planning documents are not a good idea. At best, they are poorly written and probably do not say what you think they say and at worst, are invalid because they do not comply with state law. In Maryland, all durable powers of attorney dated on or after October 1, 2010 must have two witnesses and a notary. Recently, a client handed me a durable general power of attorney for her now-incompetent father that she obtained in 2015 from an online site claiming to have a licensed Maryland attorney on staff. The power of attorney was not notarized and thus, invalid. Because her father was incompetent and not able to sign a new power of attorney, we had to petition for guardianship, which cost far more than an attorney-drafted durable power of attorney would have cost.

Estate planning can be a very complicated area of the law and so much estate litigation arises as a result of poorly drafted documents. Do not attempt this on your own; do yourself a favor and get help from an attorney.

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