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Who Pays What Taxes on an Inherited IRA?

The executor of a person’s estate must take on the important responsibility of ensuring that the deceased person’s last wishes are carried out, concerning the disposition of their property and possessions. There are times when investments and savings are part of that estate.

An individual may have an IRA that designates the beneficiary or her estate as her heir. Inherited IRAs are not like other assets. Executors must be aware of what to do when withdrawing the IRA into the estate account, particularly about how will these funds will be taxed.

nj.com’s recent article asks “Who pays taxes on this inherited IRA?” It explains that the distributions from an IRA are treated as ordinary income by the federal tax code.

The will must be probated, and it may stipulate that the money from the IRA is to be given to the deceased’s children.

These distributions to the children are taxed at their marginal tax rates. However, it is important to note that when an estate is an IRA beneficiary, the entire account must be withdrawn within five years.

If the executor moves the IRA directly into inherited IRAs for each of the beneficiary children, the beneficiaries would be responsible for paying the taxes.

If the executor withdraws the IRA assets, then the executor would pay the taxes from the estate assets.

You will need to speak with the custodian of the IRA to find out what is and is not permitted in terms of distribution: are they allowed to roll the IRA into a beneficiary IRA, or can they divide the account into separate IRAs for the beneficiaries? The distribution must take place within five years, so keep that in mind when discussing options and goals for the IRA and the heirs. An estate planning attorney will be able to determine your best tax options for the inherited IRA when settling the estate.

Reference: nj.com (January 7, 2019) “Who pays taxes on this inherited IRA?”

Am I Too Young to Start Thinking About Estate Planning?

Many people believe they’re too young to begin thinking about estate planning. Others say they don’t have significant enough assets to make the process of planning worthwhile.

However, the truth is that everyone needs estate planning. If you have any assets, and you intend to give those assets to a loved one, you need to have a plan.

Forbes’s article, “Reviewing Your Financial And Estate Planning Checklist,” examines some important topics in estate planning.

The first of topic is a durable power of attorney for property, finances and health care. This document allows you to designate a trusted individual to make decisions and take action on your behalf with matters relating to each of the three areas above.

In addition to the importance of having all powers of attorney readily available, in case you become incapable of making decisions, beneficiary designations should also be looked at frequently to update any changes to family situations, like a birth or adoption, death, marriage or divorce.

Another topic to address is a living trust. A trust will give direction regarding where and how the assets are dispersed when you die. A great reason to use a living trust is that the assets in a trust do not pass through probate court, which can be an expensive and time-consuming process.

Another area is digital assets. It’s critical for your heirs to have access to digital files, passwords and documents. This can be easy to overlook. Create a list of your digital assets, including social media accounts, online banking accounts and home utilities you manage online. Include all email and communications accounts, shopping accounts, photo and video sharing accounts, video gaming accounts, online storage accounts, and websites and blogs that you manage. This list should be clear and updated for your heirs to access.

If we fail to plan for these somewhat uncomfortable topics, the outcome will be stressful and expensive for our heirs.

Reference: Forbes (January 4, 2019) “Reviewing Your Financial And Estate Planning Checklist”

Police Warn about Scammers Targeting Seniors

Authorities are warning vulnerable seniors about phone scammers, who call and claim to be police officers, IRS agents and other government officials. One woman received a call just days after her husband died and his obituary was published in a local newspaper, reports Newsday in the article “Nassau, Suffolk police warn of phone scammers posing as officials.”

She was told that her grandson had been arrested and charged with possession of illegal drugs. To get him out of prison, the caller directed her to buy $8,000 in gift cards from a national electronics store. Frightened, the woman did as she was instructed, and gave the man the personal identification numbers on the cards when the man called her back.

Only afterwards did she realize that the man had gotten her name and her grandson’s name from her husband’s obituary. Embarrassed by her failure to realize it was a scam, she decided to speak out in the hopes it would prevent another vulnerable senior from falling victim.

Seniors are being warned to be wary of these kinds of con artists. Unfortunately, the scams are successful and that’s why they continue. Swindlers typically call victims and tell them they must take action immediately, or something very bad will happen. They sound like they mean business, and often the phone numbers that appear on the screen seem to be from a government agency. The phone numbers have been “spoofed”—altered to appear to come from a legitimate place. However, it’s all a scam.

Authorities say that many victims who are targeted are elderly, because they may not be aware of how much detailed information can now be obtained by strangers. When the caller uses their name, or names of other family members, the victim believes the call is from a legitimate agency.

However, here’s a key point: No government agency calls to demand payment in gift cards.

If the caller says they are calling from the local police station, hang up, call the local precinct to verify if the caller really works there. The same goes for utility companies or any other company allegedly threatening to turn off services. You should also note that the IRS never makes phone calls about overdue tax bills.

Anyone who receives such a call, regardless of their age, should immediately hang up.

Reference: Newsday (Jan. 4, 2019) “Nassau, Suffolk police warn of phone scammers posing as officials”

Why You Should Have an Advance Directive

An advance directive is a legal document that states a person’s preferences for medical treatment and medical decision-making, reports Valley News in an informative article titled “Advance Directives Provide Clear Guidance for Care.”

There are two components that make up an advance directive: a durable power of attorney and a treatment preferences section.

The durable power of attorney for health care allows you to appoint someone to make medical decisions, if you lack the capacity to make those decisions for yourself.

The treatment preference, which is sometimes referred to as a living will, lets you specify what kind of treatment you would want in a difficult circumstance. Treatment and care preferences usually focus on what you would want at the end of life or if you were in a permanently unconscious state. There are other preferences that can be expressed, including pain control, blood transfusions, mental health care and spiritual care. Another preference: who should—and should not—be involved in discussions about treatment.

Most people want to express their wishes to avoid aggressive measures being taken to extend their lives, when the end result will be suffering and a delay of their passing. Others chose to avoid the financial burdens that may or may not result in any kind of change in their health or the quality of their life.

Some have these documents prepared to make it clear that they want to spend their final months, weeks or days at home with loved ones with care only to relieve pain or care, so they can be conscious and able to speak with those around them.

Advance directives are a blessing to loved ones since they do not have to make hard choices in a crisis situation. They know what their aging parent or spouses wishes.

It’s important to choose the person you want to be responsible for your care well in advance. Make sure it’s someone you trust, who knows you well and will be able to make hard decisions in a highly emotional time. They’ll also have to be able to communicate with your doctors and family members.

These documents are bound by the laws of your state, so speak with an estate planning attorney who practices law in your state of residence. They’ll be able to prepare these documents on your behalf, along with a will and other estate planning documents.

Reference: Valley News (Sep. 1, 2018) “Advance Directives Provide Clear Guidance for Care”

Baby Boomers Will Leave Trillions of Dollars to Their Heirs

During the next 25 years, Americans will transfer an estimated $68 trillion to their heirs and charities. Seventy percent of that amount, almost $48 trillion, will pass from baby boomers and most of that ($32 trillion) will go to members of Generation X. Although Americans who are currently between the ages of 50 and 70 will distribute some of their assets during their lifetimes, the remainder will get transferred through their estates after they die.

Because baby boomers will leave trillions of dollars to their heirs, they and their beneficiaries should learn about the financial consequences of this magnitude of wealth transfer. Prudent planning can prevent massive losses from unnecessary taxes and other negative financial outcomes. Every dollar that you legally avoid paying to the government, is a dollar you can one day give to charity or your loved ones.

Tax Traps

You might want to help your adult children or your grandchildren now, rather than having to wait until you die. Unfortunately, giving large amounts of money to them while you are alive, can trigger gift taxes. Depending on the amount of the gift, you might find that a large chunk of your money went to the government, instead of to your loved ones.

How you leave your assets can also impact the tax consequences. For example, if you have a traditional individual retirement account (IRA) and you leave its proceeds to a beneficiary who is not your spouse, there can be a significant tax bill. In addition, some financial accounts have burdensome transfer fees, so you should check into this issue before deciding what to do with your assets.

One way to minimize taxes is to set up a trust. The laws are different in every state, and the applicable federal laws can change at any time. Be sure to you talk with your elder law attorney to set up your estate in a manner that takes tax consequences into consideration. This article does not give tax advice. You should talk with your tax advisor.

Talk with Your Beneficiaries

Open communication is essential, when formulating a wealth transfer plan for your family. Some of your children might already have financial security and would prefer that you give the assets you would leave them to their children instead.

Surprises are seldom a good idea. When a sizeable inheritance drops into a person’s lap without warning, the recipient often lacks the money management skills to handle the assets. This fact is why many lottery winners go broke within a year or two of winning millions. Talking with your heirs can give them time to mentally prepare and educate themselves on investments and other financial issues.

When you talk with your beneficiaries, you can suggest a team of professionals who can advise them on how to safeguard the assets they will receive. If not handled properly, for example, your loved ones could lose a substantial portion of the inheritance in a divorce.

Your local elder law attorney can advise you on how the regulations are different in your state from the general law of this article.

References:

AARP. “Boomers Will Pass Along Trillions, Mostly to Gen Xers.” (accessed December 29, 2018) https://www.aarp.org/money/budgeting-saving/info-2018/generational-wealth-transfer.html

How Do I Include Retirement Accounts in Estate Planning?

You probably made beneficiary designations for your retirement accounts, when you opened them. Remember: who you designated can affect your overall estate planning objectives. Because of this, when including your retirement assets in your estate, ask yourself if anything has changed in your life since then that would affect their status as your beneficiaries, as well as how they’d receive the retirement assets.

Investopedia’s recent article, “Include Your Retirement Accounts in Your Estate,” gives us some things to consider in the New Year.

Beneficiary Designations. Review your beneficiary designations after major life changes. If you fail to make these designations, the funds will most likely go into your estate—a horrible outcome from a tax and planning perspective. If your estate is named a beneficiary, your heirs must wait until probate is finished to access your retirement accounts. It is usually better to name an individual or a trust as your beneficiary.

Protecting Retirement Funds With a Trust. Another option is to include a trust in your estate planning, instead of giving your retirement funds directly to named individuals. This allows you more control over the distribution, while protecting your heirs from additional paperwork and taxes. Trust distributions keep a beneficiary from accessing and spending their inheritance all at once. It’s also a good idea if your beneficiaries include minor children who shouldn’t have direct access to the money until they are adults. Be sure to consult with an estate planning attorney, because there are tax and other complexities associated with designating a trust as beneficiary.

Required Minimum Distributions (RMDs). Your retirement plans have rules about when you are required to start taking distributions. For 401(k) accounts, you are required to start taking RMDs at age 70½. However, if you die and leave retirement plans and accounts to your heirs, these rules apply to them instead. A spousal beneficiary can roll over your retirement funds tax-free into their retirement plan and make their own distribution choices. However, other beneficiaries don’t have the same option. Tax treatment and distribution options vary, depending on who is receiving your retirement assets.

Tax Considerations. The biggest worry you need to address when designating retirement accounts as part of your estate plan, is how they’ll be taxed. Consider how to withdraw from these accounts while you’re alive and how to minimize tax consequences after you’ve passed.

Work with an estate planning attorney who has a strong understanding of retirement accounts and the tax and legal requirements of estate planning. That way you can be certain your retirement assets are distributed to the proper beneficiaries with the least tax liability.

Reference: Investopedia (August 27, 2018) “Include Your Retirement Accounts in Your Estate”

Get These Three Estate Planning Documents In 2019

These may not be the first things you are thinking about as we launch into a brand-new year, but the idea is not to wait until you’re not thinking clearly or when it’s too late and you don’t have what you need to protect yourself, your family and your property. The details, from the Fox Business news article, “3 financial documents everyone needs,” are straightforward. Put this on your to-do list today.

A Will. The essential function of a will is to ensure that your wishes are carried out, when you are no longer alive. It’s not just for rich people. Everyone should have a will. It can include everything from your financial assets to life insurance, family heirlooms, artwork and any real estate property.

A will can also be used to protect your business, provide for charities and ensure lifelong care for your pets.

If you have children, a will is especially important. Your will is used to name a guardian for your minor children. Otherwise, the state will decide who should rear your children.

Your will is also used to name your executor. That is the person who has the legal responsibility for making sure your financial obligations are honored. Without an executor, the state will appoint a person to handle those tasks.

An Advanced Medical Directive. What would happen if you became ill or injured and could not make medical decisions for yourself? An advanced medical directive and health care proxy are the documents you need to assign the people you want to make decisions on your behalf. The advanced medical directive, also called a living will, explains your wishes for care. The healthcare proxy appoints a person to make healthcare decisions for you. As long as you have legal capacity, these documents aren’t used, but once they are needed, you and your family will be glad they are in place.

A Durable Power of Attorney. This document is used to name someone who will make financial decisions, if you are not able to do so. Be careful to name a person you trust implicitly to make good decisions on your behalf. That may be a family member, an adult child or an attorney.

Once you’ve had these documents prepared as part of your estate plan, you’re not done. These documents need to be reviewed and updated every now and then. Life changes, laws change and what was a great tax strategy at one point may not be effective, if there’s a change to the law. Your estate planning attorney will help create and update your estate plan.

Reference: Fox Business (Dec. 19, 2018) “3 financial documents everyone needs”

Who Will Cover My Debt When I Die?

Did you know that we’re dying in this country with an average of $62,000 in debt? What happens to that debt?

Fox Business recently published an article that asks “What Happens to Your Debt When You Die?” As the article explains, the answer depends on a few different factors, including the type of debt, whether there was a cosigner and the value of the deceased person’s estate. Let’s look at some possible outcomes:

In many cases, any debt you owe during your lifetime will have to be paid by your estate when you pass away. Creditors can make claims against your estate during the probate process. If you died with a will and named an executor, he or she will usually use the assets you left behind to pay off your debt. If you don’t have enough assets, creditors are typically without recourse, if you had unsecured debt without a cosigner. However, if you had a secured loan, like a mortgage or a car loan, the debt would need to be paid for your family to keep the asset. For instance, if you leave your home to your family, they’d have to pay your mortgage to keep the house.

Creditor claims take precedence over your instructions as to what happens to your assets. If you stated in your will that your bank account is to pass to your children, but you owed money to a creditor, the money in the bank would first be used to pay the creditor, before your children could inherit.

If your estate doesn’t have enough assets to satisfy your debts, creditors may seek the payment from any cosigners on the loans. Cosigners share legal responsibility for debt and will be held 100% responsible for paying the remaining balance.

One potential exception to this general rule, is for certain types of student loans. For example, a Parent PLUS loan can be dischargeable due to a student’s death, and some private student loans offer a death discharge. However, it is rare. If the primary borrower on student loan debt dies, the surviving cosigner should read the loan terms to determine if he’ll still be held responsible for paying it. Federal student loan debt is typically forgiven, when the borrower dies.

Creditors can also attempt to collect from co-borrowers, if you had a joint account. Therefore, if you and your spouse had a mortgage together or shared a credit card, your spouse would be expected to continue paying the bills after your death.

However, if there’s no cosigner and not enough assets in the estate to pay the bills, creditors will charge off the debt because there’s no way to collect. Beware that creditors may attempt to guilt family members into paying after their deceased loved one’s death. However, generally there’s no requirement that you pay debt that belonged to a loved one. An exception is in states with community property laws that require spouses to pay off debt belonging to a deceased spouse using community property.

If your loved one has already passed away and you’re worried about what will happen to their debts, speak to an experienced estate planning attorney.

Reference: Fox Business (December 27, 2018) “What Happens to Your Debt When You Die?”

Good Planning Avoids the Devastating Costs of Long-Term Care

If you don’t have a plan for long-term care, welcome to the club. However, you may not want to be a member of this club, if and when you need long-term care. A recent report from the U.S. Department of Health and Human Services found that people age 65 and older have a very good chance—70%—of needing long-term care. Despite this, most people are not putting plans in place, according to an article from Westfair Online titled Keybank poll reveals clients aren’t planning for long term care.”

This is true for people with assets exceeding $1 million and for people with more modest assets. In a study by Keybank, fewer than a quarter of high net-worth clients had plans in place for long-term care. This poses real financial risks, to the individuals and their families.

Consider the costs of long-term health care. One study from Genworth Financial reports that in 2017, the national median cost of a home health aide was roughly $49,000 a year, assisted living facilities could cost $45,000 (that’s not including medical services), and a private room in a nursing home came close to $100,000 annually. Costs vary by region, so if you live in an expensive area, those costs could easily go much higher.

Why don’t people plan ahead for long-term care? Perhaps they think they will never become ill, which is not the case. They may think their health insurance will cover all the cost, which is rarely the case.  They may believe that Medicare will cover everything, which is also not true.  We have seen cases come in the office where mom or dad didn’t plan and ended up spending all of their assets on long-term care.  No legacy was left to the kids.  Very sad.

Everyone’s hope is that they are able to be at home during a long illness, or during their last illness. However, that’s often not a choice we get. This is a topic that families should discuss well in advance of any illness. Talking with family about potential end-of-life care and decisions is important for setting expectations, delegating responsibilities and avoiding unpleasant surprises.

The other part of a long-term care discussion with family members needs to be about estate plans and decisions about the disposition of assets. Everyone should have a will, and all information including deeds, trusts, bank and investment accounts and digital assets should be discussed with the family. You’ll also need a power of attorney and health care proxy to carry out your wishes. An experienced estate planning attorney can help create an estate plan and facilitate discussions with family members.

Long-term planning is an on-going event. Life changes, and so should your long-term care plan, as well as your estate plan. You should also keep communications open with your family. They will appreciate your looking out for them before and after any illness.

Reference: Westfair Online (Sep. 7, 2018) Keybank poll reveals clients aren’t planning for long term care