Tax Planning

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?”

Why Is a Revocable Trust So Valuable in Estate Planning?

There’s quite a bit that a revocable trust can do to solve big estate planning problems for many families.

As Forbes explains in its recent article, “Revocable Trusts: The Swiss Army Knife Of Financial Planning,” trusts are a critical component of a proper estate plan. There are three parties to a trust: the owner of some property (settler or grantor) turns it over to a trusted person or organization (trustee) under a trust arrangement to hold and manage for the benefit of someone (the beneficiary). A written trust document will spell out the terms of the arrangement.

One of the most useful trusts is a revocable trust (inter vivos) where the grantor creates a trust, funds it, manages it by herself, and has unrestricted rights to the trust assets (corpus). The grantor has the right at any point to revoke the trust, by simply tearing up the document and reclaiming the assets, or perhaps modifying the trust to accomplish other estate planning goals.

Revocable Trust
A Revocable Trust is one of the most useful estate planning tools

After discussing trusts with your attorney, he or she will draft the trust document and re-title property to the trust. The grantor has unrestricted rights to the property and assets transferred to a revocable trust and can be reclaimed at any time. During the life of the grantor, the trust provides protection and management, if and when it’s needed.

Let’s examine the potential lifetime and estate planning benefits that can be incorporated into the trust:

  • Lifetime Benefits. If the grantor is unable or uninterested in managing the trust, the grantor can hire an investment advisor to manage the account in one of the major discount brokerages, or he can appoint a trust company to act for him.
  • Incapacity. A trusted spouse, child, or friend can be named to care for and represent the needs of the grantor/beneficiary. They will manage the assets during incapacity, without having to declare the grantor incompetent and petitioning for a guardianship. After the grantor has recovered, she can resume the duties as trustee.
  • Guardianship. This can be a stressful legal proceeding that makes the grantor a ward of the state. This proceeding can be expensive, public, humiliating, restrictive and burdensome. However, a well-drafted trust (along with powers of attorney) avoids this.

The revocable trust is a great tool for estate planning because it bypasses probate, which can mean considerably less expense, stress and time.

In addition to a trust, ask your attorney about the rest of your estate plan: a will, powers of attorney, medical directives and other considerations.

Any trust should be created by a very competent trust attorney, after a discussion about what you want to accomplish.

Reference: Forbes (February 20, 2019) “Revocable Trusts: The Swiss Army Knife Of Financial Planning”

What Will The Taxes Be on My IRA Withdrawal?

Sometimes, the amount of taxes owed on your IRA withdrawal will be zero. However, in other cases, you will owe income tax on the money you withdraw and sometimes have to pay an additional penalty, if you withdraw funds before age 59½. After a certain age, you may be required to withdraw money and pay taxes on it.

IRA Withdrawals
Know the rules for IRA Withdrawals

Investopedia’s recent article, “How Much are Taxes on an IRA Withdrawal?” says there are a number of IRA options, but the Roth IRA and the traditional IRA are the most frequently used types. The withdrawal rules for other types of IRAs are similar to the traditional IRA, but with some minor unique differences. The other types of IRAs—the SEP-IRA, Simple IRA, and SARSEP IRA—have different rules about who can start one.

Your investment in a Roth IRA is with money after it’s already been taxed. When you withdraw the money in retirement, you don’t pay tax on the money you withdraw or on any gains you made on your investments. That’s a big benefit. To use this tax-free withdrawal, the money must have been deposited in the IRA and held for at least five years, and you have to be at least 59½ years old.

If you need the money before that, you can take out your contributions without a tax penalty, provided you don’t use any of the investment gains. You should keep track of the money withdrawn prior to age 59½, and tell the trustee to use only contributions, if you’re withdrawing funds early. If you don’t do this, you could be charged the same early withdrawal penalties charged for taking money out of a traditional IRA. For a retired investor who has a 401(k), a little-known technique can allow for a no-strings-attached withdrawal of a Roth IRA at age 55 without the 10% penalty: the Roth IRA is “reverse rolled” into the 401(k) and then withdrawn under the age 55 exception.

Money deposited in a traditional IRA is treated differently, because you deposit pre-tax income. Every dollar you deposit decreases your taxable income by that amount. When you withdraw the money, both the initial investment and the gains it earned are taxed. But if you withdraw money before you reach age 59½, you’ll be assessed a 10% penalty in addition to regular income tax based on your tax bracket. There are some exceptions to this penalty. If you accidentally withdraw investment earnings rather than only contributions from a Roth IRA before you are 59½, you can also owe a 10% penalty. You can, therefore, see how important it is to maintain careful records.

There are some hardship exceptions to penalty charges for withdrawing money from a traditional IRA or the investment portion of a Roth IRA before you hit age 59½. Some of the common exceptions include:

  • A required distribution in a divorce;
  • Qualified education expenses;
  • A qualified first-time home purchase;
  • The total and permanent disability or the death of the IRA owner;
  • Unreimbursed medical expenses; and
  • The call to duty of a military reservist.

Another way to avoid the tax penalty, is if you make an IRA deposit and change your mind by the extended due date of that year’s tax return, you can withdraw it without owing the penalty (but that cash will be included in the year’s taxable income). The other time you risk a tax penalty for early withdrawal, is when you’re rolling over the money from one IRA into another qualified IRA. Work with your IRA trustee to coordinate a trustee-to-trustee rollover. If  you make a mistake, you may end up owing taxes.

With IRA rollovers, you can only do one per year where you physically remove money from an IRA, receive the proceeds and within 60 days subsequently deposit the funds in another IRA. If you do a second, it’s 100% taxable.

You shouldn’t mix Roth IRA funds with the other types of IRAs, because the Roth IRA funds will be taxable.

When you hit 59½, you can withdraw money without a 10% penalty from any type of IRA. If it’s a Roth IRA, you won’t owe any income tax. If it’s not, there will be a tax. If the money is deposited in a traditional IRA, SEP IRA, Simple IRA, or SARSEP IRA, you’ll owe taxes at your current tax rate on the amount you withdraw.

Once you reach age 70½, you will need to take a Required Minimum Distribution (RMD) from a traditional IRA. The IRS has specific rules as to the amount of money you must withdraw each year. If you don’t withdraw the required amount, you could be charged a 50% tax on the amount not distributed as required. You can avoid the RMD completely, if you have a Roth IRA because there aren’t any RMD requirements. However, if money remains after your death, your beneficiaries may have to pay taxes.

The money you deposit in an IRA should be money you plan to use for retirement. However, sometimes there are unexpected circumstances. If you’re considering withdrawing money before retirement, know the rules for IRA penalties, and try to avoid that extra 10% payment to the IRS.

If you think you may need emergency funds before retirement, use a Roth IRA for those funds, and not a traditional IRA.

Reference: Investopedia (February 9, 2019) “How Much are Taxes on an IRA Withdrawal?”

This is the Year to Complete Your Estate Plan!

Your estate plan is an essential part of preparing for the future. It can have a dramatic effect on your family’s future financial situation. Estate planning can also have a significant impact on your tax liability immediately. Utah Business’s article, “5 Estate Planning Tips For 2019,” helps us with some tips.

Your Will. If you have a will, you’re ahead of more than half of the people in the U.S. Remember, however, that estate planning isn’t a one-time thing. It’s an ongoing process that requires making sure your plan reflects your current wishes and financial situation. You should review your will at least every few years. However, there are also some life events that should trigger a review, regardless of when the last review occurred. These include marriage, divorce, the birth or adoption of a child or grandchild, an inheritance, a large financial loss and the loss of a spouse.

If You Haven’t Started Your Estate Plan, Now is The Time.

A Trust. Anyone can create a trust, and it has big estate planning advantages. You can use a trust to pass assets to heirs and other beneficiaries, just like you could with a will. However, assets passed through a trust don’t need to go through probate, which saves time and money. Using a trust to transfer assets provides privacy.

The Current Tax Breaks. The 2017 Tax Cuts and Jobs Act gives us some significant tax cuts in 2019, such as a temporary doubled lifetime exclusion for the gift and estate tax, temporary exemptions from the generation-skipping transfer tax, higher annual gift limits and charitable contribution deductions.

Talk to an Attorney for a Review of Your Estate Plan. It’s important to remember that estate planning is based on a complex set of state and federal laws. You should, therefore, develop a comprehensive estate plan with the help of an experienced attorney. Don’t be tempted to use an online legal do-it-yourself service to save a few dollars, because any mistakes you make could have a big impact on you and your family’s financial future.

Every state has its own laws regarding the formalities required to create a valid will. If you fail to follow any of these, a court may declare your will invalid. Your entire estate will then be distributed according to the laws of intestate succession. These laws may not reflect your wishes for the distribution of your estate. Meeting with an attorney will make certain that your estate planning documents are in order. It will also help you to identify your goals and ensure that your assets are protected and transferred in the most efficient way possible.

Schedule a consultation with Mastry Law to complete your estate planning this year.

Reference: Utah Business (February 5, 2019) “5 Estate Planning Tips For 2019”

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”

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”

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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