Estate Tax

Should I Designate a Trust as Beneficiary of my IRA?

There are many pros and cons to naming a trust, rather than an individual as a beneficiary of the IRA. However, there are some complex rules. You need to get it right, because this may be your biggest asset.

Name a Trust as Beneficiary of my IRA
Naming a trust as beneficiary of your IRA has many benefits.

Investment News’ recent article on this subject asks “Should you name a trust as an IRA beneficiary?” The article explains that individual retirement account assets can’t be put into trusts directly during a person’s lifetime, without destroying the IRA’s tax shelter. Therefore, a trust may only be named as the beneficiary of the IRA. The trust would inherit the IRA upon the owner’s death, and beneficiaries of that trust would have access to the funds.

Asset protection is one rationale for making this move, because some trusts shield IRA assets from lawsuits, business failures, divorce and creditors. Taxpayers enjoy state and federal protections for IRA assets during their lifetime. However, heirs who inherit an IRA directly—not through a trust—don’t receive those protections, unless provided by state law. Trusts also allow for some control over the assets. The terms of a trust can stipulate the way in which distributions are made if an heir is a minor, disabled, financially unreliable, incapacitated or vulnerable.

Naming a trust as an IRA beneficiary may not be practical for people who plan to bequeath their IRA to a spouse, rather than their children, grandchildren or others. Spouses are allowed roll over the decedent’s IRA assets into their own IRA tax-free.

There are some technical rules to follow, like the IRA beneficiary form must indicate before a person’s death, that the trust is the primary beneficiary. After death, the IRA must be retitled as an inherited IRA. Required minimum distributions (RMDs) would still also be required for the IRA. This is an area where using the right type of trust is important. A “see-through” or “look-through” trust may be the best bet.

Structuring a trust this way maintains the IRA’s preferential tax treatment. That allows a trust beneficiary to spread the RMDs over a long period based on his life expectancy. This is called a “stretch IRA.” The RMD amount would be based on the oldest beneficiary of the trust. However, beneficiaries with separate trust shares would have different RMDs.

In addition, the trust’s language must also state that distributions from the IRA can only go to “designated beneficiaries,” not to pay expenses. The risk of not creating the trust as a see-through or including this language, is that the IRA assets are distributed and the resulting tax paid within a much shorter time frame—potentially five years.

Trusts may also be set up as “conduit” or “discretionary” trusts. With a conduit trust, the annual RMDs pass through the trust to beneficiaries, who pay tax at their individual rates. Discretionary trusts don’t distribute the RMDs out of the trust and they pay tax at the more punitive trust tax rates. However, they keep the most post-death control over assets.

Talk to an experienced estate planning attorney about these trusts and how they can work with your IRA.

Reference: Investment News (February 22, 2019) “Should you name a trust as an IRA beneficiary?”

How Do I Include Charitable Giving in My Estate Plan?

One approach frequently employed to give to charity, is to donate at the time of your death. Including charitable giving into an estate plan, is great way to support a favorite charity.

Baltimore Voice’s recent article, “Estate planning and charitable giving,” notes that there are several ways to incorporate charitable giving into an estate plan.

Charitable Giving
Incorporating charitable giving in your estate plan is one of the most common ways to give to charity.

Dictate giving in your will. When looking into charitable giving and estate planning, many people may start to feel intimidated by estate taxes, thinking that their family members won’t get as much of their money as they hoped. However, including a charitable contribution in your estate plan will decrease estate tax liabilities, which will help to maximize the final value of the estate for your family. Talk to an experienced estate attorney to be certain that your donations are set out correctly in your will.

Donate your retirement account. Another way to leverage your estate plan, is to designate the charity of your choice as the beneficiary of your retirement account. Note that charities are exempt from both income and estate taxes. In choosing this option, you guarantee that your favorite charity will receive 100% of the account’s value, when it’s liquidated.

A charitable trust. Charitable trusts are another way to give back through estate planning. There is what is known as a split-interest trust that lets you donate assets to a charity but retain some of the benefits of holding the assets. A split-interest trust funds a trust in the charity’s name. The person who opens one, receives a tax deduction when money is transferred into the trust. However, the donors still control the assets in the trust, and it’s passed onto the charity at the time of their death. There are several options for charitable trusts, so speak to a qualified estate planning attorney to help you choose the best one for you.

Charitable giving is a component of many estate plans. Talk to your attorney about your options and select the one that’s most beneficial to you, your family and the charities you want to support.

Reference: Baltimore Voice (January 27, 2019) “Estate planning and charitable giving”

Why Do I Need Estate Planning If I’m Not Rich?

Most people spend more time planning a vacation than they do thinking about who will inherit their assets after they pass away. Although estate planning isn’t the most enjoyable activity, without it, you don’t get to direct who gets the things you’ve worked so hard for after you pass away.

Estate Planning isn't only for the rich
An Estate Plan will protect your assets and your loved ones

Investopedia asks you to consider these four reasons why you should have an estate plan to avoid potentially devastating results for your heirs in its article “4 Reasons Estate Planning Is So Important.”

Wealth Won’t Go to Unintended Beneficiaries. Estate planning may have been once considered something only rich people needed, but that’s changed. Everyone now needs to plan for when something happens to a family’s breadwinner(s). The primary part of estate planning is naming heirs for your assets and a guardian for your minor children. Without an estate plan, the courts will decide who will receive your property and raise your kids.

Protection for Families With Young Children. If you are the parent of small children, you need to have a will to ensure that your children are taken care of. You can designate their guardians, if both parents die before the children turn 18. Without a will with a guardianship clause, a judge will decide this important issue, and the results may not be what you would have wanted.

Avoid Taxes. Estate planning is also about protecting your loved ones from the IRS. Estate planning is transferring assets to your family, with an attempt to create the smallest tax burden for them as possible. A little estate planning can reduce much or even all of their federal and state estate taxes or state inheritance taxes. There are also ways to reduce the income tax that beneficiaries might have to pay. However, without an estate plan, the amount your heirs will owe the government could be substantial.

No Family Fighting (or Very Little). One sibling may believe he or she deserves more than another. This type of fighting happens all the time, and it can turn ugly and end up in court, pitting family members against each other. However, an estate plan enables you to choose who controls your finances and assets, if you’re unable to manage your own assets or after you die. It also will go a long way towards settling any family conflict and ensuring that your assets are handled in the way you wanted.

To protect your assets and your loved ones when you no longer can do it, you’ll need an estate plan. Without one, your family could see large tax burdens, and the courts could say how your assets are divided, or even who will care for your children.

Reference: Investopedia (May 25, 2018) “4 Reasons Estate Planning Is So Important”

Theft Reported in Aretha Franklin’s Estate

Careful estate planning can prevent heirs from stealing assets from your estate. Aretha Franklin’s estate is a sad example.

Careful Estate Planning
Aretha Franklin’s estate woes highlight the need for careful estate planning.,

Detroit area police told the Free Press that an active theft investigation was ongoing, involving Aretha Franklin’s suburban mansion. However, the investigation began prior to her death.

The 76-year-old Queen of Soul passed away from pancreatic cancer in August in her Detroit riverfront apartment. When she died, she still owned her 4,100-square-foot Colonial-style home in Bloomfield Township, Michigan, which is in the sights of the IRS.

Wealth Advisor says in its article, “Police investigate theft from Aretha Franklin’s estate,” that the theft investigation was first reported by The Blast, a celebrity news website claiming Franklin’s estate is fighting with Franklin’s 61-year-old son, Edward, who was born when Aretha was only 14.

Her son Edward has been attempting to get a court order to force the estate to provide monthly financial documents to his mother’s heirs. However, the estate won’t turn over the information because it contends such information could negatively impact the criminal investigation involving stolen estate property.

Late last year, the IRS filed a claim in the County Probate Court, alleging that the Franklin estate owed millions in back taxes and penalties. An attorney for the estate stated that it had repaid more than $3 million in back taxes, since Franklin’s death. It’s believed that Franklin owed more than $6.3 million in back taxes from 2012 to 2018 and $1.5 million in penalties.

The Oakland County court documents did not state the exact value of her estate, which is believed to be in the tens of millions.

Immediately after her death, Franklin’s mansion, which is part of a gated community, was listed for sale at $800,000. However, it was then taken off the market. The custom-built home features six bedrooms, seven bathrooms, white marble floors and floor-to-ceiling windows overlooking two small ponds and a lap pool. The mansion also sports a sauna, a three-car garage and a jetted tub.

Franklin is said to have purchased the mansion for $1.2 million in 1997, according to The Detroit News. The home was built in 1990 and remodeled in 2002.

You can read more about asset protection on our website.

Reference: Wealth Advisor (January 11, 2019) “Police investigate theft from Aretha Franklin’s estate”

How Do I Calculate Estate Taxes?

Handling the affairs of a loved one’s estate can be stressful and difficult. However, to receive the full benefit of the gift a loved one leaves you, it’s critical to be prepared for the taxes that gift may incur. This is the advice in Investopedia’s article, “Estate Taxes: How to Calculate Them.” The article explains the potential tax liability, upon transfer of an estate after death.

The high rate of the federal estate tax (40%) motivates most people to calculate their potential estate tax beforehand. It’s a good idea to figure the amount you might owe in estate tax before something happens, instead of leaving your family to deal with the consequences afterwards.

Estate tax is calculated on the federal and state level. Florida does not have an estate tax, however, there are now still several states that have their own estate tax: Connecticut, Delaware, Hawaii, Illinois, Maine, Maryland, Massachusetts, Minnesota, New York, Oregon, Rhode Island, Vermont, Washington, as well as the District of Columbia.

The federal estate tax starts when the fair market value of your assets hits $11.18 million per individual. Each state that has an estate tax has its own minimum on when the estate tax kicks in, ranging from $675,000 to $1 million. As a result, you can be eligible to pay the state estate tax, the federal, or both. Because the estate tax is determined based on the current market value of your assets instead of what you paid for them, calculating that number can be more complex.

There’s no need to include any property you intend to leave your spouse or an eligible charitable organization. Initially, you’ll need to calculate the value of the gross estate. Debt, administrative fees, and assets that will be left to charities or a surviving spouse will then be deducted from the total market value of those assets.

Next, add any gifts, including gifts that fall above the gift tax exemption. The $11.18 million exemption includes gifts (it’s a way of keeping people from giving away their fortune before their death to avoid estate taxes).

If the loss of a loved one is imminent, preparing for the tax burden of estate transference ahead of time, can make the grieving process a little easier and can be a comforting distraction.

You can also prepare for taxes on your own estate to lessen the burden of the friends and family you leave behind. If you have questions, speak to an experienced estate planning attorney.

Reference: Investopedia “Estate Taxes: How to Calculate Them”

What Does George H.W. Bush’s Estate Look Like?

For a guy who was often derided as living in a bubble of “old money,” George H.W. Bush didn’t accumulate a whole lot of cash. However, he really didn’t need to. The whole point of dynastic wealth is that it creates a seamless support system from cradle to grave, says Wealth Advisor’s recent article, “American Dynasty: What G.H.W. Bush Leaves Behind (And Who Steps Up To Inherit).”

Bush begins near zero on paper, sells his oil company and lets the interest accumulate. When his father dies, he doesn’t record more than a $1 million windfall. At that time, these were still impressive numbers, but it wasn’t exactly dynastic money. For a Bush of his era, it’s just money. The real non-negotiable asset is the Maine summer home. He paid $800,000 cash for it when he joined the Reagan White House and sold his Texas place to raise the money. However, his 1031 exchange switching houses backfired, because he still claimed Texas residency and so got no tax break on the capital gain.

Interestingly, the Kennebunkport house hasn’t been passed on through inheritance for generations and has never been put into a trust. The relative willing to take on the house would buy it from the previous owner’s estate, but it’s currently assessed at $13 million. Purchasing it would trigger roughly a $12 million capital gain today and wipe out the entire estate tax exemption for he and Barbara.

However, President Bush had world-class tax planning, and the family lawyer in Houston has been with him since the 1980s. The house isn’t in a trust yet, but it’s owned by a shell partnership that plays a similar function.

Bush owned the partnership, and now that both George and Barbara are gone,  the partnership might roll into a trust to distribute shares in the house to the children. If that’s the case, provided the kids see value in keeping the house, the trust pays the bills. Otherwise, they will sell it one day and distribute the proceeds.

Presidential memorabilia is very valuable. Most of the President’s collection went to his library. Otherwise, there might not be a lot of cash because George didn’t live very lavishly. His government pension probably was used for his everyday expenses. Any cash left in that trust, might well have accumulated for the beneficiaries. However, interestingly, much of the income was given to the kids years ago. This may have made a big difference establishing them in lives of business and philanthropy.

Reference: Wealth Advisor (December 3, 2018) “American Dynasty: What G.H.W. Bush Leaves Behind (And Who Steps Up To Inherit)”

Why Do I Need an Estate Plan?

Investopedia’s recent article, “4 Reasons Estate Planning Is So Important,” says you should think about the following four reasons you should have an estate plan. According to the article, doing so can help avoid potentially devastating consequences for your family.

  1. An Estate Plan Keeps Your Assets from Going to Unintended Beneficiaries. A primary part of estate planning is choosing heirs for your assets. Without an estate plan, a judge will decide who gets your assets. This process can take years and can get heated. There’s no guarantee the judge will automatically rule that the surviving spouse gets everything.
  2. An Estate Plan Protects Your Young Children. If you are the parent of minor children, you need to name their guardians, in the event that both parents die before the children turn 18. Without including this in your will, the courts will make this decision.
  3. An Estate Plan Eliminates a Large Tax Burden for Your Heirs. Estate planning means protecting your loved ones—that also entails providing them with protection from the IRS. Your estate plan should transfer assets to your heirs and create the smallest tax burden as possible for them. Without a plan, the amount your heirs may owe the government could be substantial.
  4. An Estate Plan Reduces Family Headaches After You’ve Passed. There are plenty of horror stories about how the family starts fighting after the death of a loved one. You can avoid this. One way is to carefully choose who controls your finances and assets, if you become mentally incapacitated or after you die. This goes a long way towards eliminating family strife and making certain that your assets are handled in the way you want.

If you want to protect your assets and your loved ones after you’re gone, you need an estate plan. Without one, your heirs could face large tax burdens and the courts could decide how your assets are divided or even who will care for your children.

Reference: Investopedia (May 25, 2018) “4 Reasons Estate Planning Is So Important”

How Do I Set Up a Trust?

Trust funds are often associated with the very rich, who want to pass on their wealth to future heirs. However, there are many good reasons to set up a trust, even if you aren’t super rich. You should also understand that creating a trust isn’t easy.

U.S. News & World Report’s recent article, “Setting Up a Trust Fund,” explains that a trust fund refers to a fund made up of assets, like stocks, cash, real estate, mutual bonds, collectibles, or even a business, that are distributed after a death. The person setting up a trust fund is called the grantor or settlor, and the person, people or organization(s) receiving the assets are known as the beneficiaries. The person the grantor names to ensure that his or her wishes are carried out is the trustee.

While this may sound a lot like drawing up a will, they’re two very different legal vehicles.

Trust funds have several benefits. With a trust fund, you can establish rules on how beneficiaries spend the money and assets allocated through provisions. For example, a trust can be created to guarantee that your money will only be used for a specific purpose, like for college or starting a business. And a trust can reduce estate and gift taxes and keep assets safe.

A trust fund can also be set up for minor children to distribute assets to over time, such as when they reach ages 25, 35 and 40. A special needs trust can be used for children with special needs to protect their eligibility for government benefits.

At the outset, you need to determine the purpose of the trust because there are many types of trusts. To choose the best option, talk to an experienced estate planning attorney, who will understand the steps you’ll need to take, like registering the trust with the IRS, transferring assets to the trust fund and ensuring that all paperwork is correct. Trust law varies according to state, so that’s another reason to engage a local legal expert.

Next, you’ll need to name a trustee. Choose someone who’s reliable and level-headed. You can also go with a bank or trust company to be your trust fund’s trustee, but they may charge around 1% of the trust’s assets a year to manage the funds. If you go with a family member or friend, also choose a successor in case something happens to your first choice.

It’s not uncommon for people to have a trust written and then forget to add their assets to the fund. If that happens, the estate may still have to go through probate.

Another common issue is giving the trustee too many rules. General guidelines for use of trust assets is usually a better approach than setting out too many detailed rules.

Reference: U.S. News & World Report (November 8, 2018) “Setting Up a Trust Fund”

Where Do I Start as an Executor if There’s a House in the Estate?

Handling an estate can be a monumental task. The Greater Baton Rouge Business Report explains the details in its article that asks “So you inherited a house … now what?

For instance, an executor’s immediate worry might be the safety of the house. One of the first questions an heir might ask, is whether there’s a security company involved that has a contract for monitoring. If so, contact the company to see where to call should there be a security breach and change the security passwords. Another suggestion is to change the locks on the house, because who knows who has been given keys to the home over the years. Siblings might want to place valuable items in safety deposit boxes or remove them from the house, as soon as they can.

The key to this entire process among heirs is communication. Keep everyone up-to-date. This alone will reduce the risk of misunderstanding, mistrust and frustration in the family.

Different interests among siblings often creates tensions after inheriting a house. A house may have sentimental value to the heirs, but the executor must stay objective about the situation. Reducing the house to cash by selling it and dividing the proceeds, typically makes the most financial sense.

It’s costly to maintain a house in an estate and insurance and court proceedings can also be expensive. Come to an up-front agreement on terms of the sale, when drafting an estate plan, because disagreements among siblings can sometimes lead to costly and lengthy court proceedings.

Heirs might decide to keep a house, especially if it’s a beach house or mountain retreat. You’ll then need someone to be the manager. One way to accomplish this is to establish a limited liability company (an LLC) with the other heirs. This gives the heirs a more stable, corporate management structure, while allowing for more flexibility. Place a year’s worth of cash to cover of expenses into the LLC and sign an agreement between heirs that states what happens with repairs, renting the property and other scenarios.

If you do sell, the sooner you sell it and the closer to the time of death, the less likely you’ll have to pay taxes on any appreciation since the time of death and have to worry about what the value was at the date of death. Inherited assets get a new tax basis, known as the date-of-death value. Use a qualified real estate appraiser to value the property, because the beneficiaries need to know the house’s most recent value to calculate capital gains tax later, should they choose to sell it.

Reference: Greater Baton Rouge Business Report (November 13, 2018) “So you inherited a house … now what? Here’s some advice

How Do Trust Funds Work?

Trusts serve a variety of functions in estate planning, and they aren’t just for wealthy people.

Trusts can be simple, or they can be complex, depending on what type of trust is being considered and how they are structured. Trusts should be set up by an estate planning attorney who is familiar with asset ownership and how trusts impact inheritances and taxes.

TrustU.S. News & World Report’s recent article, “Setting Up a Trust Fund,” explains that a trust fund refers to a fund made up of assets, like stocks, cash, real estate, mutual bonds, collectibles, or even a business, that are distributed after a death. The person setting up a trust fund is called the grantor, and the person, people or organization(s) receiving the assets are known as the beneficiaries. The person the grantor names to ensure that his or her wishes are carried out is the trustee.

While this may sound a lot like drawing up a will, they're two different legal vehicles.

Trust funds have several benefits. A trust can reduce estate and gift taxes and keep assets safe. With a trust fund, you can establish rules on how beneficiaries spend the money and assets allocated through provisions. For example, a trust can be created to guarantee that your money will only be used for a specific purpose, like for college or starting a business.

A trust fund can also be set up for minor children to distribute assets to over time, such as when they reach ages 25, 35 and 45. A special needs trust can be used for children with special needs to protect their eligibility for government benefits.

At the outset, you need to determine the purpose of the trust because there are many types of trusts. To choose the best option, talk to an experienced estate planning attorney, who will understand the steps you'll need to take, like registering the trust with the IRS, transferring assets to the trust fund and ensuring that all paperwork is correct. Trust law varies according to state, so that’s another reason to engage a local legal expert.

Next, you'll need to name a trustee. Choose someone who’s reliable and level-headed. You can also go with a bank or trust company to be your trust fund's trustee, but they may charge around 1% of the trust's assets a year to manage the funds. If you go with a family member or friend, also choose a successor in case something happens to your primary trustee.

It’s not uncommon for people to have a trust written and then forget to add their assets to the fund. If that happens, the estate may still have to go through probate.

It’s better to create some general guidelines and have confidence in the trustee to carry out your wishes. Placing too many restrictions on a trustee will inhibit their ability to be effective on your behalf.

Reference: U.S. News & World Report (November 8, 2018)“Setting Up a Trust Fund”

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