October 9, 2015

Inheriting an IRA from Uncle Ira

Estate planning involving inherited Individual Retirement Accounts (IRAs) can be tricky. Inherited IRAs are different from other IRAs. Only an IRA inherited from a spouse can be rolled into your own IRA. Also, IRAs inherited from different people can not be consolidated into one account.

If you take assets from an inherited IRA and deposited them in your own IRA, all of those inherited IRA assets will be taxable. In addition, you will have to remove any assets you deposited from the inherited IRA which are above your allowed IRA contribution for the year ($5500 if you are under age 50 or $6500 if you are 50 or older) or you will incur further penalties.

It is important to get the titling correct not only on your statements from the IRA custodian, but also on the records your IRA custodian provides to the IRS.

The advantage to retitling the inherited IRA is that you can extend withdrawals from the IRA the length of your lifetime instead of having to withdraw the assets sooner. With an inherited IRA you must make withdrawals every year by December 31th beginning the year after the original owner’s death.

If you are not happy with the original custodian or investment, you can use a trustee-to-trustee transfer to move the IRA account to another financial institution provided the current IRA custodian allows it.

Continue reading "Inheriting an IRA from Uncle Ira" »

Bookmark and Share

October 2, 2015

Give Your Health Savings Account a Checkup

Health Savings Accounts are available for individuals who have high-deductible health plans. In 2015, a plan for an unmarried person is considered high deductible if it has an annual deductible of at least $1,300 and the annual out-of-pocket expenses (deductibles, co-payments and other expenses) that the insured must pay for covered benefits cannot exceed $6,450.

The unmarried person can contribute up to $3350 each year and an additional $1000 if he is over age 55.

For Family plans, the minimum deductible is $2600, annual out-of-pocket expenses $12,900 and contribution limit $6650 with an additional $1000 if contributor is over age 55.

Unlike Flexible Savings Accounts, Health Savings Account holders can carry over balances from year to year until the account holder’s death, and if planned properly, until the account holder’s spouse’s death.

All contributions to, distributions from and income earned in the account are free from federal income tax as long as the assets are used to pay for qualified medical expenses. Depending on the amount contributed and distributed from the account and how long the account has been established, Health Savings Account balances have the potential to be substantial.

Continue reading "Give Your Health Savings Account a Checkup" »

Bookmark and Share

September 26, 2015

Important Roth IRA Provisions

Roth IRAs (Individual Retirement Accounts) allow for tax free withdrawals of both contributions and earnings.

The person who opens a Roth and makes periodic contributions can withdraw those original contributions at anytime without penalty and with no tax owed. The rules are spelled out in IRS Publication 590, “Individual Retirement Arrangements”.

As for earnings, a Roth contributor must wait five years (calculated by the IRS as beginning January 1st of the year for which the first Roth contribution was made) before earnings can be withdrawn tax free. And the Roth contributor must be 59 1/2 years old to avoid the 10% penalty for early withdrawal on the earnings and avoid income tax on the earnings.

The Roth contributor who converts to a Roth (as opposed to opening a Roth as in the preceding paragraph) must hold the assets in the Roth for five years or until he turns 59 1/2, whichever comes first, to make penalty-free withdrawals of the converted amount. The earnings on that converted Roth are treated differently. The converter must hold the Roth for five years to withdraw any earnings tax free. The age 59 1/2 category does not come into play. Fortunately, the withdrawal rules for Roth IRAs provide that any distributions come first from contributions, then from conversions, then from earnings so there is no need to keep separate the conversion amounts from the earnings.

Continue reading "Important Roth IRA Provisions" »

Bookmark and Share

September 19, 2015

Inheriting a Brokerage Account

In his recent article in the Wall Street Journal titled: Brokerage Accounts: What to Do When You Inherit One, Matthias Rieker outlines the best way for individuals who receive a brokerage account from a deceased relative or friend to access the account.

Because brokerage firms must follow specific legal guidelines regarding who can get access to accounts, the responses by the firms are often slow. Some steps to consider which could help avoid delays are as follows:

• Investors should keep information about their beneficiaries current so they are the same as listed in their wills. Information filed with the brokerage firm prevails over designations in a will.

• Investors should consider the benefits of putting a brokerage account in a revocable living trust. Trustees can immediately access brokerage accounts titled in the trust after the grantor’s death, and the Probate process with the courts is avoided.

• Beneficiaries or executors should get the Federal Tax Identification Number for the estate as the decedent’s Social Security number is invalid after death and brokerage firms will not distribute without an identification number to assign to the account.

Continue reading "Inheriting a Brokerage Account" »

Bookmark and Share

September 12, 2015

Guardians at the Estate Planning Gates

When children are young and parents have fewer assets, choosing a guardian for your children means finding a family where your values are shared and located where you want your children to live.

With older children, consideration of their wishes comes into play when choosing a guardian. Choices about where they want to live and personality conflicts are taken into account.

There are also the financial aspects of the guardian’s role which often include a trust for the benefit of the children. With a testamentary trust, parents can stipulate an age when each child can have control over his trust assets. Age 25 or 30 is typical. It is also common to see a staggered distribution of assets such as one-third at ages 25, 30 and 35 and including trustee authority to spend assets for the benefit of the children, such as on college, prior to these distributions at ages 25, 30 and 35.

Continue reading "Guardians at the Estate Planning Gates" »

Bookmark and Share

September 3, 2015

Common Mistakes in Estate Planning

The following are typical mistakes people make when planning their estates:

• They have an outdated plan
• They have no will or an outdated will
• They rely on joint tenancy as a tool, especially children as joint tenants
• They incorrectly title an asset so an unintended beneficiary receives the asset
• They designate an inappropriate beneficiary for IRA accounts, insurance policies
and retirement benefits
• They fail to provide for a successor in interest if a primary beneficiary dies first or
disclaims the gift
• They rely on outdated or stale powers of attorney
• They do not properly coordinate their will and their trust or have no trust at all
• They fail to consider Medicaid planning

Continue reading "Common Mistakes in Estate Planning" »

Bookmark and Share

August 29, 2015

Keeping Things Even

When a parent prepares a will, keeping distributions even among the children has advantages.

It is impossible to determine what one’s children will be doing in the future and what their incomes will be. The child who is a successful computer analyst today might be out of work in five years, and the actor now bussing tables may get his big break next year.

Gifts can be made as needed to children while you are alive and can afford it. For example, a child with children can be helped with college expenses by contributing to the grandchild’s 529 college savings plan. The IRS allows the equivalent of five years’ worth of gifts to be made all at once. Accordingly, one grandparent can give $70,000 per grandchild. Both grandparents can give $140,000 per grandchild.

On the other hand, a disabled child who is not independent will likely require a bigger share of the parent’s assets. A special needs trust can be utilized to get the maximum advantage from a gift by a parent or grandparent by keeping the gift from affecting eligibility of the disabled child for government programs and payments.

Continue reading "Keeping Things Even " »

Bookmark and Share

August 22, 2015

Nothing Crummy About "Crummey" Trusts

In a recent article in the Wall Street Journal titled: A Ruling Eases Tax-Free Gifts, Laura Saunders points out a recent U.S. Tax Court ruling which affirmed allowing a couple the use of Crummey trusts to make tax-free transfers of $1.6 million without using any of their lifetime gift-tax exemptions.

A Crummey trust works by allowing people who want to put assets in trusts for heirs, including minors like grandchildren, a way to do it using their annual exclusions. These exclusions currently allow each person to give $14,000 per year to as many people as they would like without dipping into their life-time exemption (currently $5.43 million) or triggering gift tax.

For example, a couple with two married children and four grandchildren could shield $224,000 from tax to make gifts to Crummey trusts for the children, children's spouses and grandchildren (two times eight exemptions at $14,000 per exemption). If the couple made gifts in December of 2014 and January of 2015, two different tax years, they could shield almost $450,000 from taxes in very little time.

There is an important thing to remember with Crummey trusts. To satisfy the legal requirements, the heirs (or their guardians) must have the right to withdraw funds for a certain period each year, usually 30 or 60 days. But most heirs do not take money out because most know that their parents or grandparents will not make future gifts if they do.

Continue reading "Nothing Crummy About "Crummey" Trusts" »

Bookmark and Share

August 15, 2015

Mini-fridge and Powers of Attorney: A College Kid’s Must Haves

In her article Advisers Should Address These Legal Issues Before Clients’ Kids Head to College, Liz Skinner outlines the need for college students to have particular legal documents in place when they leave for school.

Power of Attorney for Property. This document allows the parent to pay a bill, secure an apartment lease for the summer or straighten out a lost credit card on the college student’s behalf while he is away.

Power of Attorney for Health Care. This document gives the parent authority to make a health care decision for the college student if the student is unconscious. It allows the parent to discuss the situation with the attending doctor.

HIPAA (Health Insurance Portability Act Authorization). This document allows medical professionals to share information about their patient (the student) with the parents.

Living Will. This document states the wishes of the student concerning the extent of life-extending medical treatment he wants to receive if he is incapacitated as well as his interest in donating organs.

Will. Having a Will in place is especially important for a student whose family has invested in estate planning techniques aimed at passing wealth down through the generations because the student’s assets will go back up to the parent if nothing is in writing stipulating otherwise.

Continue reading "Mini-fridge and Powers of Attorney: A College Kid’s Must Haves" »

Bookmark and Share

August 8, 2015

Hazards to Avoid when Inheriting an IRA – Part 3

In a recent issue of Kipplinger’s Retirement Report several problems are pointed out which can arise when someone who is not the spouse of the IRA owner inherits an IRA.

Another problem is not addressing the issues raised when there is a non-person beneficiary of an IRA.

If an IRA has several beneficiaries and one is a charity, the IRA must pay out the charity’s share by September 30 of the year following the owner’s death. If that share isn’t paid out and the IRA has not been split up among the beneficiaries, the remaining beneficiaries cannot take their withdrawals over their life expectancies. Instead, the remaining beneficiaries will be required to withdraw over the next five years everything that is in the IRA if the owner died before taking any distributions. If the owner died after distributions had begun, the beneficiaries must take their distributions based on the owner’s life expectancy, not their own life expectancies.

If a trust is a beneficiary, a copy of the trust should be sent to the IRA custodian by October 31 of the year following the owner’s death. If it is not, the trust is considered a non-designated beneficiary like the charity in the previous example and the same payout rules apply.

Continue reading "Hazards to Avoid when Inheriting an IRA – Part 3" »

Bookmark and Share

August 1, 2015

Fund That Trust

In her article, Practical Tips and Tricks on What You Should Do With Your Estate Plan, Julie Garber advises completely funding your revocable living trust so that all of your assets can be managed by the trustee.

Ms. Garber states, " Many people fail to realize that funding their trust is just as important as creating it. If an asset isn't titled in the name of the trust, then the trust agreement won't control what happens to that particular asset . . . . "

To title an asset in a trust the title of the asset needs to be changed to the trust.

Example: Title to the summer home is currently in "John Smith". By changing the title to "John Smith and Jane Smith, Trustees, or their successors in trust, under the John Smith Living Trust, dated January 1, 2009, and any amendments thereto" the summer home is titled in the trust.

Continue reading "Fund That Trust" »

Bookmark and Share

July 25, 2015

Hazards to Avoid when Inheriting an IRA - Part 2

In a recent issue of Kipplinger’s Retirement Report several problems are pointed out which can arise when someone who is not the spouse of the IRA owner inherits an IRA.

Another problem is the fact that nonspouse beneficiaries cannot roll an inherited IRA into their own IRA. A new account must be established and its titling must indicate that is an account for a beneficiary. For example, the new account would be retitled as “John Smith (deceased January 1, 2015) IRA for the benefit of Susan Jones”.

Another problem is if there are several beneficiaries with wide ranging ages. These beneficiaries should split the IRA so that each beneficiary benefits from the IRA being stretched over his life expectancy. Otherwise, the life expectancy of the oldest beneficiary will be used to calculate the required minimum distribution which will decrease the number years that the money can grow tax deferred.

For example, if the beneficiaries are an 80-year-old brother, a 55-year-old-son and a 25-year-old grandchild and the account is not split, all of the beneficiaries will be required to calculate their required minimum distributions based on the 80-year-old’s life expectancy. But if the account is split by December 31 of the year following the year the owner dies, each beneficiary can use his own life expectancy to take required minimum distributions and can decide how the money is invested. The younger the beneficiary is, the smaller his required minimum distribution and the longer the money can grow tax deferred.

Continue reading "Hazards to Avoid when Inheriting an IRA - Part 2" »

Bookmark and Share