IRA

Aug 20

Utilizing In-Marriage QDRO’s for Estate Planning

By Jessica L. Estes

As an estate planning and elder law attorney, often the most difficult type of asset to deal with is a retirement account. Not only must you consider the type of account it is, but you must understand the owner’s rights to the funds in the account, as well as the consequences, tax or otherwise, of accessing those funds, which can depend on age and/or other factors. In Maryland, retirement accounts are countable assets for Medicaid purposes, which adds another layer of complication. And, even something as simple as naming a beneficiary for the retirement account is not as simple as it may seem, especially if asset protection is your main goal.

There are many reasons why someone may need to access retirement benefits. Perhaps one’s spouse is in a nursing home and has a substantial retirement account that will have to be “spent-down” before qualifying for Medicaid, but the family wants to preserve those monies for the spouse at home, without suffering a huge tax consequence. Or, perhaps one spouse is older than the other spouse and wants to delay taking required minimum distributions (“RMD’s”), as the couple does not need the extra income and wants to avoid additional taxes.

Many people may have heard the term Qualified Domestic Relations Order (“QDRO”), but only in context to a divorce, and very few understand what a QDRO really is. Simply put, a QDRO is an order signed by an appropriate state court judge that: (1) recognizes the joint marital ownership interest in a retirement plan; (2) provides for the plan benefits between the parties – the plan participant (employee spouse) and the alternate payee (non-employee spouse); and (3) is approved, or qualified, by the retirement plan administrator. Unlike a QDRO in a divorce that transfers retirement benefits to an ex-spouse, an “in-marriage QDRO” transfers retirement benefits to a current spouse.

To be eligible for an in-marriage QDRO, the retirement account must be an Employee Retirement Income Security Act (“ERISA”) based plan, certain state pension plans, or a Federal Thrift Savings Plan. ERISA-based plans include 401k, 401(a), 403(b), corporate pension plans, some employee stock ownership plans, profit sharing plans, and State deferred compensation 457 plans. Plans that are not eligible for an in-marriage QDRO include military pensions, Federal pensions (FERS and CSRS), railroad retirement plans and privately sponsored non-qualified stock plans. Although individual retirement accounts (IRA’s) and simplified employee pension plans (SEP’s) are not immediately eligible, if a limited liability company (“LLC”) was established with a solo 401k, the funds in the IRA or SEP could be transferred to the solo 401k and then qualify for the in-marriage QDRO.

If eligible for an in-marriage QDRO, a review of the plan documents is necessary to verify the amount that may be transferred, as well as the amount that should be transferred based on the family’s needs. Similarly, an inter-spousal agreement must be drafted that is the basis for the justification of the in-marriage QDRO. The inter-spousal agreement should lay out the agreement between the spouses as to the division of the retirement funds. Using the example of the couple wanting to delay RMD’s, the agreement may state that all the retirement account will be transferred to the younger spouse which would allow the funds to remain in the account until the younger spouse reaches age 70 ½. Or, in the case of the couple wanting to qualify for Medicaid benefits, rather than “spend-down” the funds and pay taxes on that money, the retirement funds of the nursing home spouse would be transferred to the spouse still residing at home, which could avoid most, if not all, of the tax consequences and preserve the asset for the community spouse, while allowing the nursing home spouse to qualify for Medicaid benefits.

As you can see, in-marriage QDRO’s can be useful tools for estate planning but require careful drafting and knowledge of the various federal and state laws. Do not attempt this on your own; contact a qualified attorney to assist and help you navigate these complicated rules.

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.

Oct 10

#TuesdayTips: DIY Estate Documents Gone Wrong

Did you create your own documents?

Why pay a lawyer when I can get my estate documents online for free (or at least at a lesser cost than a lawyer)? Every estate planning attorney has fielded that question at some point or another. My response is usually: “I love online documents…because it usually means I’ll have more work that makes more money in the future.” After I say that, I typically get a grin across the client’s face and then they ask “why”?Read More

Sep 29

#FamilyFriday: Qualified Domestic Relations Order (QDRO)

You’ve gotten divorce and have been awarded a percentage of your spouse’s retirement account, you’re good for now, right? Wrong. Often couples come to us years after their divorce to finally collect on their marital award. They want to file their Qualified Domestic Relations Order (QDRO) and collect but they’re realizing it may be easier said than done. Now what? On this week’s #FamilyFriday article, the attorneys of ERA Law Group, LLC discuss QDROs.Read More

Jun 28, 2017

#TuesdayTips – When to NOT Do-It-Yourself

This week’s #TuesdayTips article comes one day after a recent United States Tax Court ruling in the case of Summers v. Commissioner of Internal Revenue (Docket No. 32259-15). Many individuals find themselves in a precarious situation when they decide to handle certain matters without an attorney. These “cost saving measures” sometimes result in quite a heavy burden.Read More

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