IRA

Is an Ex-Wife Entitled to an Inheritance from Her Former Husband?

Nj.com’s recent article entitled “My brother died of COVID-19. Should his ex-wife get an inheritance?” says that it’s unlikely that an ex-wife is entitled to an inheritance from her former husband’s estate.  However, the answer is highly dependent on state law.

There are three main ways property can transfer at death. They each have different rules.

ex-wife entitled to inheritance from her husband
It is not likely that an ex-wife is entitled to an inheritance from her former husband’s estate.

Joint assets. When property is held as Joint Tenants with Rights of Survivorship (JTWROS), the surviving joint owner automatically becomes the sole owner of the property. Usually, jointly owned property is retitled into individually owned property after the divorce. If this was never done, some states automatically change JTWROS property to a different form of joint ownership, called Tenancy In Common when a divorce is finalized. As a result, with tenants in common property, when one owner dies, his or her 50% ownership interest becomes a probate asset and passes pursuant to his or her will (or the state’s intestacy laws, if they didn’t have a will).

This means that even if the husband in this scenario still owned JTWROS property with his ex-wife when he passed away, she wouldn’t automatically inherit his share. She still has her own 50% share that she owned all along.

Beneficiary designations.  Property can also pass by beneficiary designation, like with life insurance or retirement accounts.

Beneficiary designations are typically updated after a divorce. However, again, ask an experienced estate planning attorney about your state laws. For example, some state’s laws revoke a divorced spouse as beneficiary, even if the beneficiary designation was never updated.

In this situation, even if the husband named his wife as a beneficiary on an insurance policy or retirement accounts and never changed it, she wouldn’t be able to collect.

Probate.  Finally, the third way that property can pass, is through the probate process. This means there’s a will.  If there was no will, it would be pursuant to the state’s intestacy laws.

An ex-spouse is never entitled to inherit property under state intestate statutes.

There’s an important caveats for these rules. They can be superseded by a divorce decree. Therefore, review the divorce decree to see whether it has any relevant language.

Reference: nj.com (Aug. 4, 2020) “My brother died of COVID-19. Should his ex-wife get an inheritance?”

How Can I Help Pay For a Grandchild’s College Tuition?

To help pay for a grandchild’s college tuition, you may want to defer the receipt of funds, until the grandchild needs to pay for tuition down the road. You can make a gift into a custody account or into a trust that qualifies as a current gift under the Uniform Gifts to Minor’s Act, or you can fund a Qualified Tuition Plan under IRC Section 529.

pay for a grandchild's college tuition
There are a few good, tax-free options for anyone who wants to help pay a grandchild’s college tuition.

Forbes’ recent article entitled “Estate Planning Primer: Qualified Tuition Plans” explains that there are two kinds of 529 programs: prepaid plans and savings plans. The advantage of a 529 plan over a Unified Gift to Minors Act plan is that the earnings on the assets in the 529 plan aren’t taxed, until the funds are distributed. The distributions are also tax-free up to the amount of the student’s “qualified higher education expenses.”

Prepaid Programs: Some colleges let you buy tuition credits or certificates at current tuition rates, even though your grandchild won’t be starting college until several years in the future. This allows you to lock in today’s rates for her enrollment many years later. This move can result in substantial savings, since tuition continues to rise at most colleges and universities and can often provide the biggest bang for your buck when you help pay for a grandchild’s college tuition.

Savings Programs: Similar to a Traditional IRA or a Roth IRA, tuition amounts covered by a savings plan are dependent on the investment performance of the money you have in the plan. If it grows, more cost can be covered. But if it declines, less will be covered. Therefore, it is good to be conservative, if the need for distributions is coming soon.

Qualified Higher Education Expenses: Tuition (including up to $10,000 in tuition for an elementary or secondary public, private, or religious school), fees, books, supplies, and required equipment, as well as reasonable room and board are qualified expenses, if the student is enrolled at least half-time. Note that distributions in excess of qualified expenses are taxed to the student, if they represent earnings on the account. A 10% penalty can also be imposed.

Beneficiary: The beneficiary of the program is specified when you start the funding. However, you are able to change the beneficiary or roll over the funds in the program to another plan for the same or a different beneficiary without income tax liability.

Eligible Schools: If you’re going to help pay for a grandchild’s college tuition you need to make sure that they are going to attend an eligible school.  Any college, university, vocational school, or other post-secondary school eligible to participate in a student aid program of the Department of Education will be eligible schools for these programs.

The contributions made to the qualified tuition program are treated as gifts to the student. They qualify for the annual gift tax exclusion ($15,000 per person per year for 2020) adjusted annually for inflation. If your contributions in a year exceed the exclusion amount, you can elect to take the contributions into account over a five-year period starting with the year of the contributions.

Note that you may not be able to make the distributions from the program when a very young (or unborn) beneficiary goes to college, so name an alternative custodian, perhaps a parent of a grandchild, to make distributions for you.

Reference: Forbes (Aug. 5, 2020) “Estate Planning Primer: Qualified Tuition Plans”

Tapping an Inherited IRA?

Many people are looking at their inherited IRAs this year, when COVID-19 has decimated the economy. The rules about when and how you can tap the money you inherited changed with the passage of the SECURE Act at the end of December 2019. It then changed again with the passage of the CARES Act in late March in response to the financial impact of the pandemic.

Things are different now, reports the article “Read This Before You Touch Your Inherited IRA Funds” from the News & Record, but one thing is the same: you need to know the rules.

First, if the owner had the account for fewer than five years, you may need to pay taxes on traditional IRA distributions and on Roth IRA earnings. This year, the federal government has waived mandatory distributions (required minimum distributions, or RMDs) for 2020. You may take out money if you wish, but you can also leave it in the account for a year.

Surviving spouses who don’t need the money may consider doing a spousal transfer, rolling the spouse’s IRA funds into their own. The RMD doesn’t occur until age 72. This is only available for surviving spouses, and only if the spouse is the decedent’s sole beneficiary.

The federal government has also waived the 10% early withdrawal penalty for taxpayers who are under 59½. If you are over 59½, then you can access your funds.

The five-year method of taking IRA funds from an inherited IRA is available to beneficiaries, if the owner died in 2019 or earlier. You can take as much as you wish, but by December 31 of the fifth year following the owner’s death, the entire account must be depleted. The ten-year method is similar, but only applies if the IRA’s owner died in 2020 or later. By December 31 of the tenth year following the owner’s death, the entire IRA must be depleted.

Heirs can take the entire amount in a lump sum immediately, but that may move their income into a higher tax bracket and could increase tax liability dramatically.

A big change to inherited IRAs has to do with the “life expectancy” method, which is now only available to the surviving spouse, minor children, disabled or chronically ill people and anyone not more than ten years younger than the deceased. Minor children may use the life expectancy method until they turn 18, and then they have ten years to withdraw all remaining funds.

There is no right or wrong answer, when it comes to taking distributions from inherited IRAs. However, it is best to do so only when you fully understand how taking the withdrawals will impact your taxes and your long-term financial picture.

Reference: News & Record (May 25, 2020) “Read This Before You Touch Your Inherited IRA Funds”

How the CARES Act has Changed RMDs for 2020

Before the CARES Act, most retirees had to take withdrawals from their IRAs and other retirement accounts every year after age 72. However, the Coronavirus Aid, Relief and Economic Security Act, known as the CARES Act, has made some big changes that help retirees. Whether you have a 401(k), IRA, 403(b), 457(b) or inherited IRA, the rules have changed for 2020. A recent article in U.S. News & World Report, “How to Skip Your Required Minimum Distribution in 2020,” explains how it works.

For starters, remember that taking money out of any kind of account that has been hit hard by a market downturn, locks in investment losses. This is especially a hard hit for people who are not working and won’t be able to put the money back. Therefore, if you don’t have to take the money, it’s best to leave it in the retirement account until markets recover.

RMDs are based on the year-end value of the previous year, so the RMD for 2020 is based on the value of the account as of December 31, 2019, when values were higher.

Remember that distributions from traditional 401(k)s and IRAs are taxed as ordinary income. A retiree in the 24% bracket who takes $5,000 from their IRA is going to need to pay $1,200 in federal income tax on the distribution. By postponing the withdrawal, you can continue to defer taxes on retirement savings.

Beneficiaries who have inherited IRAs are usually required to take distributions every year, but they too are eligible to defer taking distributions in 2020. Experts recommend that if at all possible, these distributions should be delayed until 2021.

Automatic withdrawals are how many retirees receive their RMDs. That makes it easier for retirees to avoid having to pay a huge 50% penalty on the amount that should have been withdrawn, in addition to the income tax that is due on the distribution. However, if you are planning to skip that withdrawal, make sure to turn off the automated withdrawal for 2020.

If you have already taken the distribution before the law was passed (in March 2020), you might be able to roll the money over to an IRA or workplace retirement account, but only within 60 days of the distribution. You can also only do that once within a 12-month period. If the deadline for a rollover contribution falls between April 1 and July 14, you have up to July 15 to put the funds into a retirement account.

For those who have contracted COVID-19 or suffered financial hardship as a result of the pandemic, the distribution might qualify as a coronavirus hardship distribution. Talk with your accountant about classifying the distribution as a COVID-19 related distribution. This will give you an option of spreading the taxes over a three-year period or putting the money back over a three-year period.

Reference: U.S. News & World Report (May 4, 2020) “How to Skip Your Required Minimum Distribution in 2020

What Should I Know About the Secure Act of 2019 and IRAs?

New federal rules for IRAs will significantly add to the tax burden for some heirs by telescoping the permitted period for withdrawals. But this pain can be greatly reduced by converting regular IRAs to Roth IRAs before bequeathing them, explains CNBC’s recent article entitled “Here’s a way to beat the tax burden for IRA heirs.”  

Before the new legislation, all heirs could enjoy their entire life expectancy to take withdrawals from inherited IRAs. As a result, they were able to stretch out these accounts, and the tax on withdrawals, over decades. That’s why they were given the nickname “stretch IRAs.”

But this changed in December of 2019 when Congress passed the Secure Act of 2019. The bill preserves the lifelong stretch period for surviving spouses, minor children, the chronically ill, and other individuals who aren’t more than 10 years younger than their benefactors (this group would include most siblings). However, for other heirs—including adult children—the new rules restrict the stretch period to a single decade. Beginning with the IRA bequests from benefactors who die in 2020, heirs must now take out all of the funds from these accounts within 10 years and pay ordinary income tax on each withdrawal.

A wise solution for some is to convert their regular IRA into a Roth IRA. Unlike regular IRAs, contributions to Roth IRAs are made solely with post-tax money. Though unlike regular IRAs, Roth IRAs carry no income tax on withdrawals, the Secure Act means they will now be required to drain the account within 10 years of inheritance.

Note that as you get near retirement, converting to a Roth has a few other advantages. Holders of regular IRAs must begin taking annual required minimum distributions (RMD’s) at age 72 (before the new legislation in December, this age was 70½).

However, if you plan to keep working or are retiring with sufficient income from other resources, you may not decide to take withdrawals. Rather, you may want to allow these assets in your account to grow intact rather than gradually weaning them for withdrawal. Converting to a Roth allows you to do this.

Depending on your situation, a Roth conversion might be a wise option if—not only to lessen your heirs’ tax burden but also to sustain the growth of your retirement nest egg.

Reference: CNBC (Feb. 12, 2020) “Here’s a way to beat the tax burden for IRA heirs”

What Should I Know about Beneficiary Designations?

A designated beneficiary is named on a life insurance policy or some type of investment account as the designated recipient of those assets, in the event of the account holder’s death. The beneficiary designation doesn’t replace a signed will but takes precedence over any instructions about these accounts in a will. If the decedent doesn’t have a will, the beneficiary may see a long delay in the probate court.

If you’ve done your estate planning, most likely you’ve spent a fair amount of time on the creation of your will. You’ve discussed the terms with an established estate planning attorney and reviewed the document before signing it.

FEDweek’s recent article entitled “Customizing Your Beneficiary Designations” points out, however, that with your IRA, you probably spent far less time planning for its ultimate disposition.

The bank, brokerage firm, or mutual fund company that acts as custodian undoubtedly has a standard beneficiary designation form. It is likely that you took only a moment or two to write in the name of your spouse or the names of your children.

A beneficiary designation on account, like an IRA, gives instructions on how your assets will be distributed upon your death.

If you have only a tiny sum in your IRA, a cursory treatment might make sense. Therefore, you could consider preparing the customized beneficiary designation form from the bank or company.

You can address various possibilities with this form, such as the scenario where your beneficiary predeceases you, or she becomes incompetent. Another circumstance to address, is if you and your beneficiary die in the same accident.

These situations aren’t fun to think about but they’re the issues usually covered in a will. Therefore, they should be addressed, if a sizeable IRA is at stake.

After this form has been drafted to your liking, deliver at least two copies to your custodian. Request that one be signed and dated by an official at the firm and returned to you. The other copy can be kept by the custodian.

Reference: FEDweek (Dec. 26, 2019) “Customizing Your Beneficiary Designations”

How Does the SECURE Act Change Your Estate Plan?

The SECURE Act has made big changes to how IRA distributions occur after death. Anyone who owns an IRA, regardless of its size, needs to examine their retirement savings plan and their estate plan to see how these changes will have an impact. The article “SECURE Act New IRA Rules: Change Your Estate Plan” from Forbes explains what the changes are and the steps that need be taken.

Some of the changes include revising wills and trusts which include provisions creating conduit trusts that had been created to hold IRAs and preserve the stretch IRA benefit, while the IRA plan owner was still alive.

Existing conduit trusts may need to be modified before the owner’s death to address how the SECURE Act might undermine the intent of the trust.

Rethinking and possibly completely restructuring the planning for the IRA account may need to occur. This may mean making a charity the beneficiary of the account, and possibly using life insurance or other planning strategies to create a replacement for the value of the charitable donation.

Another alternative may be to pay the IRA balance to a Charitable Remainder Trust (CRT) on death that will stretch out the distributions to the beneficiary of the CRT over that beneficiary’s lifetime under the CRT rules. Paired with a life insurance trust, this might replace the assets that will ultimately pass to the charity under the CRT rules.

The biggest change in the SECURE Act being examined by estate planning and tax planning attorneys is the loss of the “stretch” IRA for beneficiaries inheriting IRAs after 2019. Most beneficiaries who inherit an IRA after 2019 will be required to completely withdraw all plan assets within ten years of the date of death.

One result of the change of this law will be to generate tax revenues. In the past, the ability to stretch an IRA out over many years, even decades, allowed families to pass wealth across generations with minimal taxes, while the IRAs continued to grow tax tree.

Another interesting change: No withdrawals need be made during that ten-year period, if that is the beneficiary’s wish. However, at the ten-year mark, ALL assets must be withdrawn, and taxes paid.

Under the prior law, the period in which the IRA assets needed to be distributed was based on whether the plan owner died before or after the RMD and the age of the beneficiary.

The deferral of withdrawals and income tax benefits encouraged many IRA owners to bequeath a large IRA balance completely to their heirs. Others, with larger IRAs, used a conduit trust to flow the RMDs to the beneficiary and protect the balance of the plan.

There are exceptions to the 10-year SECURE Act payout rule. Certain “eligible designated beneficiaries” are not required to follow the ten-year rule. They include the surviving spouse, chronically ill heirs and disabled heirs. Minor children are also considered eligible beneficiaries, but when they become legal adults, the ten year distribution rule applies to them. Therefore, by age 28 (ten years after attaining legal majority), they must take all assets from the IRA and pay the taxes as applicable.

The new law and its ramifications are under intense scrutiny by members of the estate planning and elder law bar because of these and other changes. Speak with your estate planning attorney to review your estate plan to ensure that your goals will be achieved in light of these changes.

Reference: Forbes (Dec. 25, 2019) “SECURE Act New IRA Rules: Change Your Estate Plan”

What has the Average American Saved for Retirement?

It’s the question we all wonder about, but not very many of us will come out and ask. A 2019 analysis of more than 30 million retirement accounts by Fidelity Investments found that the average balance in corporate sponsored 401(k) plans at the end of 2018 was $95,600. When it came to traditional, Roth and rollover IRAs, the number was $98,400, reports Investopedia in a recent article titled “What Is the Size of the Average Retirement Nest Egg?” A look at 403(b) and other defined contribution retirement plans in the non-profit sector found that it was $78,7000. These numbers were down between 7.8%-8% from the same quarter of the prior year. Blame the stock market for that.

Averages like this only indicate a few things. Younger workers, for example, tend to have less in their retirement accounts than older workers. Their salaries are smaller, and they haven’t had decades to accumulate tax deferred income in their accounts. However, that gap is wide.

A June 2018 report from the Transamerica Center for Retirement Studies looked at a nationally representative sample of more than 6,000 workers and broke out retirement savings by generation. The boomer members had estimated median retirement savings of $164,000 in 2017, while Gen Xers had $72,000 and millennials had $37,000.

Aside from age, the big factors in retirement savings success seem to be education and income. People with higher income put more money into their retirement accounts. The Transamerica study shows that households with incomes of under $50,000 had estimated median retirement savings of $11,000. Households with incomes between $50,000 and $99,999 had median savings of $61,000 and those with incomes of $100,000 or more had $215,000.

The higher the level of education, the more money people have set aside for retirement.

Therefore, if you’re wondering how your nest egg compares to the average nest egg, the first thing you’ll want to do is decide to whom you want to compare yourself and your nest egg. You can compare yourself to the U.S. population in general, or to people who are more like you in education, age and income.

Here’s an unnerving thought: no matter if your nest egg is way above your peer group, that doesn’t mean it will be enough when retirement rolls around. Everyone’s situation is different, and life hands us unexpected surprises.

One way to prepare is to have an estate plan. If you don’t already have an estate plan, which includes a will, power of attorney, health care power of attorney, possibly trusts and other strategic tools for tax planning and wealth transfer, make an appointment with an estate planning attorney.

Reference: Investopedia (Sep. 24, 2019) “What Is the Size of the Average Retirement Nest Egg?”

Are Inheritances Taxable?

Inheritances come in all sizes and shapes. People inherit financial accounts, real estate, jewelry and personal items. However, whatever kind of inheritance you have, you’ll want to understand exactly what, if any, taxes might be due, advises the article “Will I Pay Taxes on My Inheritance” from Orange Town News. An inheritance might have an impact on Medicare premiums, or financial aid eligibility for a college age child. Let’s look at the different assets and how they may impact a family’s tax liability.

Bank Savings Accounts or CDs. As long as the cash inherited is not from a retirement account, there are no federal taxes due. The IRS does not impose a federal inheritance tax. However, there are some states, including Iowa, Kentucky, Maryland, Nebraska, New Jersey and Pennsylvania, that do have an inheritance tax. Speak with an estate planning attorney about this tax.

Primary Residence or Other Real Estate. Inheriting a home is not a taxable event. However, once you take ownership and sell the home or other property, there will be taxes due on any gains. The value of the home or property is established on the day of death. If you inherit a home valued at death at $250,000 and you sell it a year later for $275,000, you’ll have to declare a long-term capital gain and pay taxes on the $25,000 gain. The cost-basis is determined, when you take ownership.

Life Insurance Proceeds. Life insurance proceeds are not taxable, nor are they reported as income by the beneficiaries. There are exceptions: if interest is earned, which can happen when receipt of the proceeds is delayed, that is reportable. The beneficiary will receive a Form 1099-INT and that interest is taxable by the state and federal tax agencies. If the proceeds from the life insurance policy are transferred to an individual as part of an arrangement before the insured’s death, they are also fully taxable.

Retirement Accounts: 401(k) and IRA. Distributions from an inherited traditional IRA are taxable, just as they are for non-inherited IRAs. Distributions from an inherited Roth IRA are not taxable, unless the Roth was established within the past five years.

There are some changes coming to retirement accounts because of pending legislation, so it will be important to check on this with your estate planning attorney. Inherited 401(k) plans are or eventually will be taxable, but the tax rate depends upon the rules of the 401(k) plan. Many 401(k) plans require a lump-sum distribution upon the death of the owner. The surviving spouse is permitted to roll the 401(k) into an IRA, but if the beneficiary is not a spouse, they may have to take the lump-sum payment and pay the resulting taxes.

Stocks. Generally, when stocks or funds are sold, capital gains taxes are paid on any gains that occurred during the period of ownership. When stock is inherited, the cost basis is based on the fair market value of the stock or fund at the date of death.

Artwork and Jewelry. Collectibles, artwork, or jewelry that is inherited and sold, will incur a tax on the net gain of the sale. There is a 28% capital gains tax rate, compared to a 15% to 20% capital gains tax rate that applies to most capital assets. The value is based on the value at the date of death or the alternate valuation date. This asset class includes anything that is considered an item worth collecting: rare stamps, books, fine art, antiques and coin collections fall into this category.

Speak with an estate planning attorney before signing and accepting an inheritance, so you’ll know what kind of tax liability comes with the inheritance. Take your time. Most people are advised to wait about a year before making any big financial decisions after a loss.

Reference: Orange Town News (May 29, 2019) “Will I Pay Taxes on My Inheritance”

Your Will Isn’t the End of Your Estate Planning

Even if your financial life is pretty simple, you should have a will. And once you have a will, that’s not the end of your estate planning.  There’s still some work to be done to make sure your family isn’t left with an expensive mess to clean up.  Assets must be properly titled, so that assets are distributed as intended upon death.

Your Will is only one piece of your estate planning.

Forbes’ recent article, “For Estate Plan To Work As Intended, Assets Must Be Properly Titled” notes that with the exception of the choice of potential guardians for children, the most important function of a will is to make certain that the transfer of assets to beneficiaries is the way you intended.

However, not all assets are disposed of by a will—they pass to beneficiaries regardless of the intentions stated in the will. Your will only controls the disposition of assets that fall within your probated estate.

An example of when a designated beneficiary controls the disposition of a financial asset is life insurance. Other examples are retirement accounts, such as a 401(k) or an IRA. When there’s a named beneficiary, assets will be distributed accordingly, which may be different than the intentions stated in a will.

The title of real estate controls its disposition. When property is jointly owned, how it is titled determines if the decedent’s interest in the property passes to the surviving partner, becomes part of the decedent’s estate, or passes to a third party. Titling of jointly owned property can be complicated in community property states.

In the same light, a revocable trust is an inter vivos or living trust that’s created during the grantor’s life, as part of an estate plan.

Such a trust can be used to ensure privacy, avoid the expenses and delays in the probate process and provide for continuity of asset management. A critical part of the planning is that the grantor must transfer (or retitle) assets to the trust.

Wills are very important in estate planning. To ensure that your estate plan fulfills your intentions, talk to an estate planning attorney about the proper titling of your assets.

Reference: Forbes (May 20, 2019) “For Estate Plan To Work As Intended, Assets Must Be Properly Titled”

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