death

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.

Mar 05

Prenuptial and Postnuptial Agreements – Why You Should Have One

By: Valerie E. Anias, Esq.

There is a misconceived notion that asking for or discussing a prenuptial or postnuptial agreement implies distrust or concern over your relationship and its future. This isn’t true! There are a significant number of benefits gained as a result of a prenuptial agreement, or postnuptial agreement if you’re already married.

There are two ways to dissolve a marriage: divorce and death. Prenuptial or postnuptial agreements help in making the dissolution as easy as possible.

The reality is this: marriage is both a romantic and business relationship. With very few exceptions nearly everything is or becomes marital. As such, nearly everything can become subject of costly litigation in the event of divorce or death. A well drafted and all-inclusive agreement will limit many of these issues. For example, the agreement will identify what is and is not marital property, each parties’ rights in the event of death or divorce, predetermine rights and obligations for spousal support, inheritance, and more. In addition, the agreement will have a complete financial disclosure including each spouses’ assets, liabilities, and income.

A properly drafted agreement will provide a full financial disclosure to both prospective or current spouses. It will list all assets, income, real property, personal property, etc. For example, what if you have your great-grandmother’s engagement ring? You’d want to be sure that said ring would remain with you, your children, and/or your family. If you were to pass, the value of that ring may ultimately be considered part of your estate and have to be divided. That could mean sold.

When contemplating whether you think a prenuptial or postnuptial agreement is needed for you, you should consider whether you want to be on the hook for your partner’s debt in the event of divorce or marriage? Whether you want your spouse from a second marriage to inherit more than your children from their first marriage? Whether you want your private business to be impacted in the event of divorce or death?

Obtaining a prenuptial or postnuptial agreement is simply a combination of planning and protection. Planning for the future of your spouse, children, and yourself while simultaneously protecting your spouse, children, and yourself.

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.

Oct 03

#TuesdayTips: Financial Powers of Attorney – To Be or Not to Be?

That is a valid question. One that is not pondered enough and often results in a family member being thrown into a position of great responsibility without any direction or idea how they are to act or what they are to do. In fact, most people sign power of attorney documents naming someone, but then never tell them or have a conversation with that person about what will be expected of them.Read More

Sep 19

What You Don’t Know Can Hurt You

One of the most common misconceptions is that if you are married and you die without a will, your spouse automatically gets everything. Unfortunately, that often is not the case. Instead, it depends on several factors. First, if you have any joint accounts, those accounts will pass automatically to the joint account holder. Second, if you have a named beneficiary on any account or asset, that account or asset will pass automatically to the designated beneficiary. Read More

Jul 14

#FamilyFriday – Prenuptial Agreements: Why You Should Get One!

There is a misconceived notion that asking for a prenuptial agreement or discussing it in some way implies distrust or concern over your relationship. This isn’t true! There are a significant number of benefits to obtaining a prenuptial agreement that the attorneys at ERA Law Group, LLC want to bring to your attention for this week’s #FamilyFriday article!Read More

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