Details of the New SECURE Act

You may have heard some talk about the new SECURE Act. But what are the details and how does it impact you?

The SECURE Act proposes a number of changes to retirement savings. These include changes to parts of IRAs and 401(k)s. Although it is still under review, the Act is expected to be passed in some form after revisions. Some of the changes that the Act makes look to be common sense, like broadening access to IRAs and 401(k)s, as well as including updating the rules to reflect that retirement is now a longer period of life. However, with these changes come potential limitations with stretch IRAs.

Forbes asks in its recent article “Are Concerns Over Stretch IRAs And The SECURE Act Justified?” In general, an IRA is a tax-wrapper for your investments. While the investments stay in the IRA, you do not have to pay any tax on income made from those investments. A traditional IRA is where your contributions can be made tax-free for the time being, with tax due upon withdrawal. Alternatively, you can contribute after-tax dollars and have your distributions be tax-free if you use a Roth IRA. The SECURE act isn’t changing this fundamental process during the lifetime of the person who contributed to the IRA. Instead, it is altering what happens when that person, still has an IRA balance at death.

If you’ve ever spoken with someone who inherited an IRA, you have probably heard of the Stretch IRA. A Stretch IRA can be a great estate planning tool. Here’s how it works: you give the IRA to a young beneficiary in your family. The tax shield function of the IRA is then “stretched,” for what can be decades because the length of the IRA will now extend to the end of the beneficiary’s lifetime. This is important because the longer the IRA lasts, the more your investments can continue to grow. In a sense, this will protect that growth from taxes for a longer period of time.

However, the SECURE Act could change that: instead of IRA funds being spread and distributed to the beneficiary over the lifetime of the beneficiary, they’d be spread and distributed over a much shorter period. Based on the provisions of the SECURE Act as it stands, that period will likely be 10 years. That’s a big change for estate planning because a beneficiary will now have to withdraw that investment within a shorter period of time, be taxed on that income sooner, and lose out on the benefits of letting the investments grow for longer.

It’s good to keep in mind, though, that for a person who uses their own IRA throughout retirement and uses it up or passes it to their spouse as an inheritance—the SECURE Act changes almost nothing. In fact, IRAs are slightly improved for these individuals due to the new ability to continue to contribute after age 70½ and other small improvements. Therefore, most typical IRA holders will be unaffected or benefit to some degree. For many people, the bulk of IRA funds will be used in retirement and the Stretch IRA is less relevant. If you are planning to use the IRA as a distribution for your children or other people to inherit, however, talk to a tax advisor or attorney to understand how the SECURE Act will impact your estate plan.

Reference: Forbes (July 16, 2019) “Are Concerns Over Stretch IRAs And The SECURE Act Justified?”

Second Marriage? Make Sure Your Estate Plan Is Ready

It’s always a good idea to review your estate plan, especially when a major life event, like a second marriage, is taking place. The use of pre-nuptial agreements gives prospective spouses the opportunity to discuss one another’s rights of inheritance and clarify a great many issues, says nwi.com in the article “Estate Planning: Planning for second marriages.”

There’s a second opportunity to sign an agreement detailing inheritance rights after the wedding takes place, called a “post-nuptial agreement.” The problem is that once the wedding has occurred and you are both legally married, you might get stuck with some surprises and, well, you’re married. For most people, it’s better to set things out before the wedding, rather than after.

Having the discussion prior to marriage can also help with financially planning your life together. There may have been dissolution decrees in one or both of the couple’s prior divorces that have requirements which must be satisfied, such as maintaining a life insurance policy with the ex-spouse as a beneficiary. This can have an impact on the couple’s estate plan. Because of arrangements like this, it is recommended that you have everything discussed upfront in the pre-nup.

There are also additional steps that should be followed for any estate review upon a marriage. First, make sure that the last will and testament reflects your new spouse. For second marriages in particular, you want to make sure any mention of the prior spouse lists them as just that, a prior spouse only.

Next, verify and confirm how all of the assets are owned. Will they continue to be owned by just one spouse, or converted to jointly owned? Does your estate plan have a trust, and if so, are assets owned by the trust? Does there need to be a change made to your trustees?

Many people don’t remember how their bank accounts are titled. Fewer still can tell you who their beneficiaries are on their retirement accounts, life insurance policies and bank accounts. Remember: the beneficiary designations are going to determine who receives these assets, regardless of any language in your last will and testament. Once you die, there is no way to contest that distribution. Review your accounts and make sure that the beneficiaries are up to date, especially if you want to remove your prior spouse from your designations.

Part of your pre-nup and estate plan review should include a discussion of inheritance rights for any children in the blended family. Do you want to leave assets only for your children, or do you want to leave assets for all the children? It’s not an easy conversation to have, especially at the start of the blending process.

Remember also that blended family dynamics can change over the years. When you review your estate plan next—in three to four years—you’ll have the opportunity to make changes that hopefully will reflect deepening bonds between all of the family members. Your estate planning attorney will help create and revise estate plans as your life circumstances evolve.

Reference: nwi.com (May 5, 2019) “Estate Planning: Planning for second marriages”

Filing Taxes for a Deceased Family Member

If you are the executor of a loved one’s estate, and if they were well-off, there are several tax issues that you’ll need to deal with. The article “How to file a loved one’s taxes after they’ve passed away” from Market Watch gives a general overview of estate tax liabilities.

Winding down the financial aspects of the estate is one of the tasks done by the trustee or executor. That person will most likely be identified in the decedent’s trust or will. If the family trust holds the assets on behalf of the deceased, the trust document will name a trustee. If the person died without a will or trust, also known as “intestate,” the probate court will appoint an administrator.

The executor is responsible for filing the federal income tax for the decedent’s estate in cases where a return needs to be filed. Income generated by the estate, even after the death of your loved one, is subject to income tax. The estate’s first federal income tax year starts immediately after the date of death. The tax year-end date can be December 31 or the end of any other month that results in a tax year of 12 months or less. The IRS form 1041 is used for estates and trusts and the due date is the 15th day of the fourth month, after the fiscal tax year-end.

For example, if a person died in 2019 and the trustee chooses December 31, 2019 date as the tax year-end, the estate tax return deadline is April 15, 2020. An extension is available, but it’s only for five and a half months. In this example, an extension could be granted for September 30.

There is no need to file a Form 1041 if all of the decedent’s income producing assets are directly distributed to the spouse or other heirs and bypass probate or trust administration. This is the case when property is owned as joint tenants with right of survivorship, as well as with IRAs and retirement plan accounts and life insurance proceeds with designated beneficiaries.

The trustee also needs to keep in mind transfer tax issues, such as the estate tax and the gift tax. For recent years, this is not as much of a concern because no federal estate tax will be due unless the estate is valued at more than $11.2 million for a person who passed in 2018 or $11.4 million in 2019.

However, the trustee also needs to find out if there were large gifts given. That means gifts larger than $15,000 in 2018-2019 to a single person, $14,000 for gifts in 2013-2017; $13,000 in 2009-2012, $12,000 for 2006-2008; $11,000 for 2002-2005 and $10,000 for 2001 and earlier. If these gifts were made, the excess over the applicable threshold for the year of the gift must be added back to the estate, to see if the federal estate tax exemption has been surpassed. Check with the estate attorney to ensure that this is handled correctly.

Whether or not a person died leaving property to a spouse also impacts whether or not tax will be due. The unlimited marital deduction privilege permits any amount of assets to be passed to the spouse, as long as the decedent was married, and the surviving spouse is a U.S. citizen. However, the surviving spouse will need good estate planning to pass the family’s wealth to the next generation without a large tax liability.

While the tax consequences and tax planning strategies are more complex where significant assets are involved, an estate planning attorney can strategically plan to protect family assets, when the assets are not so grand. In fact, estate planning is more important for those with modest assets, as there is a greater need to protect the family and less room for error.

Reference: Market Watch (June 17, 2019) “How to file a loved one’s taxes after they’ve passed away”

What Do I Tell My Kids About Their Inheritance?

For some parents, it can be difficult to discuss family wealth with their kids. You may worry that when your child learns they’re going to inherit a chunk of money, they’ll drop out of college and devote all their time to their tan.

Kiplinger’s recent article, “To Prepare Your Heirs for Future Wealth, Don’t Hide the Truth,” says that some parents have lived through many obstacles themselves. Therefore, they may try to find a middle road between keeping their kids in the dark and telling them too early and without the proper planning. However, this is missing one critical element, which is the role children want to play in creating their own futures.

In addition to the finer points of estate planning and tax planning, another crucial part of successfully transferring wealth is open, honest, and consistent communication between parents and their children. This can be valuable on many levels, including having heirs learn about, understand, and see the family vision while also bolstering personal relationships between parents and children through trust, honesty and vulnerability.

For example, if the parents had inherited a $25 million estate and their kids would be the primary beneficiaries of their own estate, transparency would be of the utmost importance. While that inheritance might lead the children to believe that they could use all this money for their own plans, careers, and dreams, that might not be the case if the parents had other intentions for this inheritance, such as a charity or a comfortable retirement. This lack of communication might impact the way kids plan for their own futures, whereas an upfront family discussion about how the money would or would not be used for the children’s lives would have equipped the children to plan appropriately for their own futures.

Without having conversations with parents about the family’s wealth and how it will be distributed, the support a child gets now and what they may receive in the future may be far different than what they originally thought. With this information, the child could make informed decisions about their future education and how they would live.

Heirs can have a wide variety of motivations to understand their family’s wealth and what they stand to inherit. However, most concern planning for their future. As a child matures and begins to assume greater responsibility, parents should identify opportunities to keep them informed and to learn about their children’s aspirations, and what they want to accomplish.

The best way to find out about an heir’s motivation is simply to talk to them about it.

Reference: Kiplinger (May 22, 2019) “To Prepare Your Heirs for Future Wealth, Don’t Hide the Truth”

How Do I Lessen the Chance of My Children Fighting at My Death?

There are several actions that a parent can take to decrease the chance of a fight after their death, says nj.com in its recent article, “My brothers might start a fight over mom’s will. What can she do about it?”

Trying to decide how to divide property is a common estate planning challenge. Some people decide inheritances should be split among heirs equally, with the same amount left to each heir. Others decided to divide their estate “equitably,” in some other way that is considered fair.

For instance, let’s say a parent would like to leave the family home to their only daughter. Without additional information, it may not be clear if the parent is planning to leave the daughter only the home while the other assets will be distributed to their sons, or if they intend to distribute their assets unevenly among the children.

If the home is valued similarly to whatever other assets the parent is leaving their sons, there may not be a fight. But if the house represents most of the parent’s net worth and the sons’ inheritances will be much smaller, it could create hard feelings, which may prompt the sons to bring an action in probate court.

It is important to note that a person can’t contest a trust simply because they think the inheritance is unfair. The trust contest must have some other legal basis. In California, the primary reasons to contest a valid trust are either because the decedent lacked testamentary capacity or was subject to undue influence.

If you are looking to avoid a fight, an attorney can help draft a trust that will prepare in advance for either of these grounds for a trust contest. As far as testamentary capacity is concerned, an attorney should test the parent before allowing them to sign the trust. Another option would be for the parent to tape a video that shows them signing the trust. This would make it more difficult for their sons to claim they didn’t have mental capacity.

The parent can also include language in the trust explaining why the inheritance isn’t equal. If they see the reasoning behind their decision—and it’s rational—the sons may be less likely to allege undue influence. To that end, the settlor may want to prepare a letter of intent to explain their reasoning. Although this is not a legal document, it may be helpful to show their intent in case the trust is contested.

Another option that can be used in some states is a no-contest clause. A no-contest clause states that if an heir challenges the trust and loses, then they will get nothing.

Another option would be for the parent to change the deed to their house to a life estate deed.

An estate planning attorney needs to be consulted to prepare the estate plan with the parent so that they can be sure that their wishes are followed. The attorney will also be able to provide some helpful insight into the family dynamic.

Reference: nj.com (May 3, 2019) “My brothers might start a fight over mom’s will. What can she do about it?”

How Do I Correctly Title My Property for My Estate Plan?

The way you title your real and personal property and who you name as your beneficiaries is just as important in your estate planning as your trust says The Black Hills Pioneer’s recent article, “Titling of property is just as important as your Will or Trust.”

There are some kinds of property that, depending on how they are titled or who’s the named beneficiary, will flow outside of the control of your trust.

For instance, if you designate a beneficiary to your life insurance policy or on your retirement account, that money goes directly to the named beneficiary at your death. This process completely bypasses the terms of your trust unless you named your estate or trust specifically as the beneficiary.

Beneficiaries show up on other types of accounts as well. You could designate another person as payable on death (POD) designee or transfer on death (TOD) designee on your investment account or your bank account. These types of accounts also transfer automatically to the named designee and similarly is not controlled by your trust if your trust is not the designee.

This principle applies to real property too. If title to real estate is taken in a certain manner, then jointly owned real estate would automatically flow to the surviving joint owner, not pursuant to your trust. Generally, if language lists multiple individuals on the property as “joint tenants with rights of survivorship,” then the survivor(s) will automatically inherit the decedent owner’s share. Keep in mind, however, that this isn’t automatic just because the property is owned jointly, rather it depends on how the property is titled.

You can, therefore, see how critical it is that you discuss these issues with your estate planning attorney. In addition to questions about trusts, you should also be discussing the titling of your property and the beneficiaries you’ve named on your life insurance and retirement accounts, along with any POD and TOD designees you’ve named on your investment accounts or bank accounts.

If you don’t, you could create problems for your family and loved ones.

Reference: Black Hills Pioneer (August 5, 2019) “Titling of property is just as important as your Will or Trust”

Grandparents Lose Millions to People Pretending to Be Their Grandchild

Con artists steal an average of $9,000 per person from older victims, by convincing the seniors that their grandchildren are in a crisis. These imposters stole over $41 million from Americans in 2018. If you learn how grandparents lose millions to people pretending to be their grandkids, you can avoid becoming a victim of this scam and help others avoid this fate as well.

The losses from this scam are skyrocketing. In 2017, $26 million of losses were reported, with one out of 14 people age 70 and older reporting that they paid money to the fraudsters. However, in 2018, one out of every four of the people in this group reported having handed money over to the con artists. The grandchild impostor scam is getting much worse. We need to get the message out to prevent future financial abuses of seniors.

The scam usually starts with a telephone call to the grandparent. Here are some of the common tactics the fraudsters use to steal from grandparents:

  • The caller pretends to be injured and fakes uncontrolled sobbing to disguise the caller’s voice. Most grandparents would recognize the voice of a grandchild, so the pretend crying masks the difference in the caller’s voice and that of the grandchild.
  • The caller pretends to be a friend of a grandchild and says they have been arrested or are in some other form of legal trouble and cannot call for themselves. The con artist says the grandchild went on a quick trip to another country and got into trouble there. This tactic makes it less likely the grandparent will travel to where the grandchild supposedly is, to render help in person. About half of the incidents that result in grandparents sending cash payments involve a claim of legal trouble.
  • The con artist claims the grandchild was in a car accident and needs money for the hospital or doctor. Sometimes the crook will claim the grandchild was at least partly at fault or had been drinking, to motivate the grandparent to keep the matter private.
  • The crook says the grandchild told him the grandparent is the only person who can help or the only one whom the grandchild trusts. Another common allegation is the grandchild is embarrassed about the situation and does not want anyone to know. The purpose of these claims is to decrease the likelihood the grandparent will check with any other relatives to see if the story is true.
  • The scammer provides some personal information about you or your family in an attempt to verify the call is legitimate. You cannot trust this information, because the con artist probably got the details about you and your family from social media postings.

What to Do If You Get a Family or Friend Emergency Phone Call

Security experts say if you get a phone call like this, it is almost certainly a scam. You should pause and think before acting. Write down the information from the caller, but do not provide any of your information over the telephone. Absolutely do not provide your address, date of birth, credit card number, bank account information or any other personal data.

Contact family members to verify whether the grandchild is indeed traveling or has gotten into trouble with the law. If you suspect the call was a scam, you should report it to the Federal Trade Commission.

References: AARP. “Family Emergency Scams Cost Victims $41M.” (accessed August 1, 2019) https://www.aarp.org/money/scams-fraud/info-2018/cash-grandparent.html 

Advance Planning Key for Alzheimer’s Patients

A retired physician and his wife have allowed a local television station to report their family’s journey with Alzheimer’s over the course of the last four years. The series continues with WCCO CBS Minnesota’s article “All Lined Up Before You Need It’: Alzheimer’s Association Shares Steps for Estate Planning,” with four steps to take if you notice that a family member is having memory lapses or trouble with simple tasks.

The Quinn family—Dr. Paul Quinn and his wife Peg—had some tough conversations years ago. This was a period when Paul’s memory was better, and when he was able to be completely honest with his wife about his wishes and what the couple would need to do moving forward.

Peg Quinn said that getting everything lined up long before it’s needed is very important.

If there’s any sign of cognitive decline, there are legal and financial steps that must be pursued. Start with addressing the family budget and projected medical costs for long term care. If possible, gather all family members together for a planning session.

If they live in different parts of the state, or of the country, ask the family members to travel for a weekend family meeting. This is the kind of planning that is better when everyone is physically present.

Start by naming a power of attorney. It needs to be someone who is aware of the situation and will be able to make decisions on behalf of the diagnosed individual. An estate planning attorney can assist in making this decision.

Next, establish an advance health care directive with a focus on medical decisions. This may be the toughest part since it is impossible to know how long someone will live with Alzheimer’s, or what kind of lifestyle that person would be living. According to the Alzheimer’s Association, the average patient lives between four to eight years while suffering from Alzheimer’s. The cost of care can add up fast—as much as $5,000 to $7,000 a month in some cases.

That’s why the next step—selecting an elder law estate planning attorney is so important. Planning for long-term care, qualifying for Medicaid and other benefits, is a complex challenge.

Dr. Quinn expressed his wishes to stay in his home as long as possible. The familiarity of their home makes life much easier for both of them, so they agreed early on to have in-home care if it’s ever needed.

An estate planning attorney can help the family by drafting any necessary estate planning documents and creating a plan as early as possible. A trust must be created and executed before the person is legally incompetent. The same goes for a power of attorney and any health care power of attorney documents. Medicaid planning should be done as soon as possible since there is a five-year look-back period concerning transferring any assets.

Whether you or a family member just got a diagnosis or already in the throes of Alzheimer’s, consult an estate planning attorney to review any documents or arrangements to ensure that your affairs are in order and that you are prepared for the future.

Reference: WCCO CBS Minnesota (July 23, 2019) “’All Lined Up Before You Need It’ : Alzheimer’s Association Shares Steps for Estate Planning”

Portland Museum Wins $4.6 Million Lawsuit

Families are not the only ones embroiled in estate battles. The Portland Museum of Art won a $4.6 million court award after they convinced a jury that a caretaker of a wealthy woman had unduly influenced the woman to change her will and give the caretaker her entire estate. The museum said that an early version of the woman’s estate plan makes it quite clear that the museum was to receive an art collection and a major cash gift after she died.

Eleanor Potter signed an estate plan in 2014, in which she stated that she intended to give much of her estate to the museum, as reported in the Press Herald’s article “Portland Museum of Art wins $4.6 million in lawsuit over benefactor’s will.”

About six months later, said the museum’s attorney, a new will was signed that named her caretaker as the sole beneficiary.

The museum’s attorney said the caretaker coerced Potter into making the change, depriving the museum of the art and cash. The jury agreed and granted the museum a request for punitive damages, in addition to the originally intended gift to the museum. The museum said the punitive damages request was made as an effort to deter any others from trying to take similar actions.

It took the jury only one hour to come to a conclusion. They were unanimous in their finding. In Oregon state civil cases, six of nine jurors must agree on a verdict. This is unlike a criminal trial, where a unanimous verdict beyond a reasonable doubt is required for a conviction.

As part of her estate plan in March 2014, Potter made the museum a “remainder” benefactor of her estate, meaning that it would receive all of her art collection and money left over after fulfilling specific bequests to others. This is a commonly used strategy to give money to museums and nonprofits.

A few months later, she fired the attorneys who created that plan and in October 2014 had a new will created that named the caretaker as her sole heir. The woman had cared for Potter for many years and moved into her home after Potter broke a hip in 2012. The museum alleged that the caretaker conducted a “long, systematic and relentless” campaign of control, threatening Potter and telling her she would have to go to a nursing home. During phone calls with attorneys, the caretaker could actually be heard coaching Potter on what to tell the attorneys.

The caretaker’s attorney claimed that Potter simply wanted to take care of her. Her attorney said the museum acted as if it was “entitled to Eleanor’s estate.”

The museum issued a statement after the verdict was announced, acknowledging that Eleanor Potter had been a longtime supporter of the museum over many decades and expressed gratitude that her intent to promote art and culture could now be recognized.

Reference: Press Herald (July 22, 2019) “Portland Museum of Art wins $4.6 million in lawsuit over benefactor’s will.”

What Do I Need to Know Before Becoming an Executor?

When a loved one dies, those who are in charge of taking care of the estate frequently enter an unfamiliar world with unfamiliar technical terms. One of these may be the word “executor.” An executor steps in for the person who wrote the will and makes sure that all the final arrangements are carried out.

When you agree to be named the executor or personal representative of an estate, it’s a big decision. It is far more significant than most people realize. There are many responsibilities to think about before agreeing to take on the role. Investopedia’s recent article, “5 Things to Consider Before Becoming an Estate Executor” lists five things to consider before saying yes.

  1. Complexity of the Estate. Typically, the larger the estate—which can be in terms of property, possessions, assets, or the number of beneficiaries—the harder and more time consuming it will be. The best way to see how difficult the job will be is to request to see a copy of the current will. If there are obvious red flags, like unequal distributions to children or trusts or annuities, it may be best to say no.
  2. Time Commitment. This job takes a substantial amount of time and energy, and also requires a lot of attention to detail. Truth be told, almost all of it has to do with the details. Before you agree to execute a will, you should be sure that you have the time to do the job. It’s also important to review your decision to serve as an executor every time your situation changes, like when you get married, have children or change locations. It’s not unusual for a testator to change executors throughout a lifetime.
  3. Immediate Responsibilities. You may agree to be an executor, thinking that it’ll be years before you have to do any work. However, that’s not always the case. You should be sure the testator is keeping a list of assets and debts and knows where the original will and the asset list are being held and how to access them. You should also have a list of the contact information for attorneys or agents named by the testator. You can also discuss the testator’s wishes for a funeral or memorial service, including instructions for burial or cremation. Although this conversation may be uncomfortable, it will make your role as executor much smoother, and will also ensure that the testator’s wishes are being fulfilled.
  4. Duties After the Testator Dies. This is when the executor must make funeral arrangements, locate the will, initiate probate, manage assets, pay all debts, submit tax returns and more. This can be a snap if you’re organized and detail-oriented. If everything is disorganized, however, it can take much longer and require a bigger effort on your part to corral all the information needed.
  5. How You’ll Be Paid. Each state has laws on how an executor is paid. An executor is also entitled to be compensated for expenses incurred, as they carry out their responsibilities. Executors can also refuse compensation, which is common if you’re doing this for a member of your family.

It’s an honor to be asked to be an executor. It means the testator trusts you to carry out their final wishes and to see to their legacy. However, be sure that you’re up to the task.

Reference: Investopedia (June 25, 2019) “5 Things to Consider Before Becoming an Estate Executor”