Retirement Accounts

Planning for the Unexpected

Sadly, this is not an unusual situation. The daughter spoke with her mother once or twice a week, and the fall happened just after their last conversation. She dropped what she was doing and drove to the hospital, according to the article “Parents” in BusinessWest.com. At the hospital, she was worried that her mother was suffering from more than fractures, as her mother was disoriented because of the pain medications.  She had no idea whether her mother had done any planning for unexpected events such as this.

planning for the unexpected
Without taking time to plan for unexpected events, things can get complicated…quick.

The conversation with her brother and mother about why she wasn’t notified immediately was frustrating. They “didn’t want to worry her.” She was worried, and not just about her mother’s well-being, but about her finances, and whether any plans were in place for this situation.

Her brother was a retired comptroller, and she thought that as a former financial professional, he would have taken care of everything. That was not the case.

Despite his professional career, the brother had never had “the talk” with his mother about money. No one knew if she had an estate plan, and if she did, where the documents were located.

All too often, families discover during an emergency that no planning for unexpected events has taken place.

The conversation took place in the hospital, when the siblings learned that documents had never been updated after their father had passed—more than 20 years earlier! The attorney who prepared the documents had retired long ago. Where the original estate planning documents were, mom had no idea.

For this family, the story had a happy ending. Once the mother got out of the hospital, the family made an appointment to meet with an estate planning attorney to get all of her estate planning completed. In addition, the family updated beneficiaries on life insurance and retirement accounts, which are now set to avoid probate.

Both siblings have a list of their mother’s assets, account numbers, credit card information and what’s more, they are tracking the accounts to ensure that any sort of questionable transactions are reviewed quickly. They finally have a clear picture of their mother’s expenses, assets and income.

If your family’s situation is closer to the start of the story than the end, it’s time to contact a qualified estate planning attorney who is licensed to practice in your state and have all the necessary preparation done. Don’t wait until you’re uncovering family mysteries in the hospital.

Reference: BusinessWest.com (Aug. 1, 2019) “Parents”

Should My Estate Plan Include a Trust?

There are as many types of trusts, as there are reasons to have trusts. They all have benefits and drawbacks. What type of trust is best for you? The answer is best discussed in person with an estate planning attorney. However, an article from U.S. News & World Report titled “8 Things to Know About Trusts,” gives a good overview.

Estate Plan
Determining whether your estate plan should include a trust is best done by consulting with an estate planning attorney.

Revocable or Irrevocable? Revocable trusts are usually established for a person (the grantor) during their lifetime, and then pass assets to the named beneficiaries, when the grantor dies. The revocable trust allows for a fair amount of flexibility during the grantor’s lifetime. An irrevocable trust is harder to change, and in some cases cannot be changed or amended. Some states do allow the option of “decanting” trusts, that is, pouring over assets from one trust to another. You’ll want to work with an experienced estate planning attorney to be sure trusts are set up correctly and achieve the goals you want.

Trusts can protect assets. Irrevocable trusts are often used, when a grantor must go into a nursing home and the goal is to protect assets. However, this means that the grantor no longer has access to the money and has fundamentally given it away to the trust. Putting assets into an irrevocable trust is commonly done to preserve assets, when a person will need to become eligible for Medicaid.  The trust must be created and funded five years before applying for benefits. Irrevocable trusts can also be used to obtain veteran’s benefits, if they are asset-based. VA benefits have a three-year look-back period, as compared to Medicaid’s five-year look-back period.

Trusts can’t own retirement accounts. Trusts can own non-retirement bank accounts, life insurance policies, property and securities. However, retirement accounts become taxable immediately, if they are owned by a trust.

Trusts help avoid probate after the grantor’s death. Most people think of trusts for this purpose. Assets in a trust do not pass through probate, which is the process of settling an estate through the courts. Having someone named as a trustee, a trusted family member, friend or a financial institution, means that the assets can be managed for the beneficiaries, if they are not deemed able to manage the assets. Another good part about trusts: you can direct how and when the funds are to be distributed.

Trusts offer privacy. When a will is filed in the courthouse, it becomes part of the public record. Trusts are not, and that keeps assets and distribution plans private. A grantor could put real estate and other personal property into a trust and title of ownership would remain private.

Tax savings. Before the federal estate tax exemptions became so high, people would put assets into trusts to avoid taxation. However, state taxes may still be avoided, if the assets don’t reach state tax levels. You can also transfer funds into an irrevocable trust to transfer it to others, without making it become part of a taxable estate. This is something to discuss in detail with an estate planning attorney.

Irrevocable Trusts can be expensive. If you are considering an irrevocable trust as a means of controlling the cost of an estate, this is not the solution you are looking for. Trusts require careful administration, annual tax filings and other fees. You may also lose the advantage of long-term capital gains by putting assets into trusts, since they are taxed upon withdrawal, and usually based upon current market value. The marginal rates for trust income of all kinds apply at much lower levels, so that the highest marginal taxes will be paid on very low levels of income.

Work with an experienced trusts and estates lawyer. Trusts and their administration can be complex. Seek the help of a trusts and estates attorney, who will be able to factor in tax liability and the impact of the trusts on the rest of your estate plan. Remember that every state has its own laws about trusts. Finally, an estate plan needs to be updated every few years. For example, trusts that were set up for a far lower federal estate tax exemption several years ago are now out of date, and may not work to achieve their intended goal. The laws changes, and the role of trusts also changes.

Reference: U.S. News & World Report (March 29, 2019) “8 Things to Know About Trusts”

Is a Surviving Spouse Liable for a Deceased Spouses’ Loan?

Whether a deceased spouse’s debt becomes the responsibility of the surviving spouse, depends on several factors.

There are a few factors that go determine whether or not a surviving spouse has to pay back a debt. Don’t do anything, until you understand the entire picture.

MP900411753First, let’s make this clear: you don’t want your family to remember you as the person who left your surviving spouse burdened with a debt that she didn’t know about until after you died. Unfortunately, this does happen. However, the surviving spouse does not always share the debt.

nj.com’s recent article, “My husband died. Must I pay his loan?” explains that whether a deceased spouse's debt becomes the responsibility of the surviving spouse, depends on several factors.

Let’s say that you’re 67, and your husband passes away suddenly. What if he decided last year that he wanted to explore the open road and took out a $50,000 loan, in his name only, to buy a Class A recreational vehicle (RV) with beechwood cabinets and custom sea glass interiors that sleeps five. You didn’t want it and you can’t afford it. What do you do?

There’s usually spousal liability for debts incurred by the non-debtor spouse only for necessary goods and services, like medical expenses. Therefore, a Class A RV with beechwood cabinets and custom sea glass interiors that sleeps five easily qualifies. However, the surviving spouse’s options depend on the contracts executed by the late husband and the discussions that his widow is now having with the bank.

Any assets in the name of decedent—like the Class A RV with beechwood cabinets, etc.—or paid into the deceased spouse's estate, would have to be liquidated and used to pay creditors in the order of priority, as determined by state statute.

In Florida, the law says the costs and expenses of administration must be paid first, followed in order of priority by the other costs of administering the estate, like the personal representatives compensation and attorney fees, the funeral expenses, taxes, medical expenses, and then all other claims.

Any life insurance or retirement funds that are paid directly to a beneficiary, and not paid to the estate of the decedent, do not have to be used to pay the decedent's debts and expenses, unless the beneficiary is required to pay the debt, as a result of being a spouse obligated to pay for necessaries, a co-signer or obligor or for similar reasons.

If, however, the estate has no assets and cannot pay all outstanding claims, claims within the same priority level must be paid pro rata.

Each situation is different, so the surviving spouse should speak with an experienced estate planning attorney, who is familiar with the laws of the state.

Reference: nj.com (August 20, 2018) “My husband died. Must I pay his loan?”

Proper Planning for the Distribution of an IRA

Understand the rules, so the money goes where you want it to.

The rules for IRA distributions can be complicated. Unforeseen circumstances can make things even more complex. Understand the rules, so the money goes where you want it to.

Bigstock-Family-Portrait-At-Christmas-4881212What happens if you designate each of your two adult children as 50/50 beneficiaries of your IRA, and then one of them dies? Will the funds go to your grandchildren?

MarketWatchanswered that question in its article, “Who gets your IRA when you die? It’s not so simple.”The answer to what happens to the IRA money is dependent upon what the beneficiary designations say and when one of the children passes away. The beneficiary designations state how it will be distributed. However, that may not be what is written in your will.

If the children are alive when the IRA owner dies, and she simply named them 50/50 outright beneficiaries, they will each get half the funds. Each child could do whatever they wanted, including placing the funds in an inherited IRA account and naming their choice of beneficiaries.

 However, if either child dies before the parent with the IRA passes away, and she doesn’t update the beneficiary designation before she dies, there are two common default arrangements built into account forms for IRAs, retirement accounts, life insurance policies, annuity contracts, and “transfer on death” arrangements available in some states. One is per capita: if one child is dead at the time of the parent’s death and is still listed as a 50% beneficiary, then 100% of this share will go to the surviving child.

The other common arrangement is per stirpes—Latin for “by the root.” Here, rather than the predeceasing child’s share going to their surviving sibling, the share goes to the deceased beneficiary’s children.

Be sure to obtain a copy of what you filed for your beneficiary designations.  You should carefully review the language to be certain that it meshes with your wishes. If you want your assets to flow differently, speak with an estate planning attorney about drafting a custom beneficiary designation. Some people don’t want one of their beneficiaries to inherit outright and have free reign with the funds. An attorney can help protect that person and the money.

If you want to have people who are not “linear” decedents be beneficiaries, such as family friends or spouses of children, you’ll need to sit down with an estate planning attorney to make sure that the legal documents are correctly drafted. You may decide to use a custom beneficiary designation or trusts to achieve this.

Reference: MarketWatch(March 17, 2018) “Who gets your IRA when you die? It’s not so simple”

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