Alternatives for Stretch IRA Strategies

The majority of many people’s wealth is saved gradually from a lifetime of work and stored in their IRAs. For most of these people, a primary goal is to leave their IRAs to their children, says a recent article from Think Advisor titled “Three Replacements for Stretch IRAs.” The ability to distribute IRA wealth over years, and even decades, was eliminated with the passage of the SECURE Act.

The purpose of the law was to add an estimated $428 million to the federal budget over the next 10 years. Of the $16.2 billion in revenue provisions, some $15.7 billion is accounted for by eliminating the stretch IRA.

Existing beneficiaries of stretch IRAs will not be affected by the change in the law. But going forward, most IRA heirs—with a few exceptions, including spousal heirs—will have to take their withdrawals within a ten-year period of time.

The estate planning legal and financial community is currently scrutinizing the law and looking for strategies that will minimize the tax consequences of this new rule. Here are three estate planning approaches that are emerging as front runners:

Roth conversions. Traditional IRA owners who wished to leave their retirement assets to children may be passing on big tax burdens now that the stretch is gone, especially if beneficiaries themselves are high earners. An alternative is to convert regular IRAs to Roth IRAs and take the tax hit at the time of the conversion when the IRA owner is presumably in a lower tax bracket than their working children.

There is no guarantee that the Roth IRA will never be taxed, but tax rates right now are relatively low. If tax rates go up, it might make converting the Roth IRAs too expensive.

This needs to be balanced with state inheritance taxes. Converting to a Roth could reduce the size of the estate and thereby reduce tax exposure for the estate as well.

Life insurance. IRA owners can take distributions from an IRA to pay for a new life insurance policy to be distributed to their beneficiaries. When the beneficiaries receive the death benefit, it will not be included as the beneficiary’s income. This is being widely touted as the answer to the loss of the stretch, but like all other methods, it needs to be viewed as part of the entire estate plan. While this method is not a new strategy, it may be used more frequently due to the elimination of the stretch.

Charitable Remainder Trusts (CRT). The IRA could be used to fund a charitable remainder trust. This allows the person setting up the trust to establish an income stream for heirs with the IRA assets, and then have any amounts remaining upon the heirs’ deaths going to a named charity. The trust can grow assets tax-free. There are two different ways to do this: a charitable remainder annuity trust, which distributes a fixed annual annuity and does not allow continued contributions, or a charitable remainder unitrust, which distributes a fixed percentage of the initial assets and does allow continued contributions.

Speak with your estate planning lawyer about what options may work best in your unique situation.

Reference: Think Advisor (Jan. 24, 2020) “Three Replacements for Stretch IRAs”

Estate Planning for Unmarried Couples

For some couples, getting married just doesn’t feel necessary. However, they need to know that they don’t enjoy the automatic legal rights and protections that legally wed spouses do, especially when it comes to death. There are many spousal rights that come with a marriage certificate, reports CNBC in the article “Here’s what happens to your partner if you’re not married and you die.” Without the benefit of marriage, extra planning is necessary to protect each other.

For one, taxes are a non-starter. There’s no federal or state income tax form that will permit a non-married couple to file jointly. If one of the couple’s employers is the source of health insurance for both, the amount that the company contributes is taxable to the employee. A spouse doesn’t have to pay taxes on health insurance.

More important, however, is what happens when one of the partners dies or becomes incapacitated. A number of documents need to be created, so should one become incapacitated, the other is able to act on their behalf. Preparations also need to be made, so the surviving partner is protected and can manage the deceased’s estate.

In order to be prepared, an estate plan is necessary. Creating a plan for what happens to you and your estate is critical for unmarried couples who want their commitment to each other to be protected at death. The general default by law for a married couple (even a very unprepared one with no documents) is that everything goes to the surviving spouse. However, for unmarried couples, the default may be a sibling, children, parents or other relatives. It definitely won’t be the unmarried partner.

This is especially relevant when a person dies with no will. The courts in the state of residence will decide who gets what, depending upon the law of that state. If there are multiple heirs who have conflicting interests, it could become nasty—and expensive.

However, a will isn’t all that is needed.

Most tax-advantaged accounts—Roth IRAs, traditional IRAs, 401(k) plans, etc.—have beneficiaries named. That person receives the assets upon the death of the owner. The same is true for investment accounts, annuities, life insurance and any financial product that has a beneficiary named. The beneficiary receives the asset, regardless of what is in the will. This can be an easy way to include an unmarried partner in your estate plan.

Checking, savings and investment accounts that are in both partner’s names will become the property of the surviving person, but accounts with only one person’s name on them will not. A Transfer on Death (TOD) or Payable on Death (POD) designation should be added to any single-name accounts.

Unmarried couples who own a home together need to check how the deed is titled, regardless of who is on the mortgage. The legal owner is the person whose name is on the deed. If the house is only in one person’s name, it may be difficult to transfer to the other person. Change the deed so both names are on the deed with rights of survivorship, so both are entitled to assume full ownership upon the death of the other.

To prepare for incapacity, an estate planning attorney can help create a durable power of attorney for health care so that partners will be able to make medical decisions on each other’s behalf. A living will should also be created for both people, which states wishes for end of life decisions. For financial matters, a durable power of attorney will allow each partner to have control over the other’s financial affairs.

It takes a little extra planning for unmarried couples, but the peace of mind that comes from knowing that you have prepared to care for each other until death do you part is priceless.

Reference: CNBC (Dec. 16, 2019) “Here’s what happens to your partner if you’re not married and you die”

How Do I Help My Parents with Money Problems?

According to a 2019 study by the Transamerica Center for Retirement Studies, 8% of Gen Xers and 3% of Boomers say supporting their parents is a top financial priority in their lives.

Next Avenue’s recent article entitled “When Your Parents Need Financial Help” says that if this is a financial priority for you, try a respectful approach to see the extent of your parents’ money issues and what you might be able to do to help.

In reviewing their finances, keep an eye out for one financial issue in particular that your parents may have: they may have failed to set aside money for long-term care, because of their debts.

However, before you jump in with both feet, consider your own money situation. Remember that your own finances come first because you may otherwise risk your own long term stability by overcommitting. Therefore, if you can afford to help them, you have to establish boundaries. If you have siblings, bring them into the discussion and ask about sharing the responsibility. After you figure out to what extent you can afford to help financially, reach out to your parents — with care. You don’t want to come off as criticizing or judging them for making financial mistakes or bad financial decisions.

It’s important to begin the conversation early. You also may want to refer your parents to a financial planner or to a credit counselor. If housing is a major expense, it may be time for your parents to downsize to a more affordable home. You can also look into having them move in with you.

If not a topic of discussion, perhaps you’re able to review their expenses to see what they can cut and help them find ways to improve their financial situation. You should also look into federal, state, and local resources, like benefits for which your parents may be eligible.

After you’ve delved into all the resources, and you’re also ready to help your parents financially, make sure you incorporate all of this newfound research and knowledge into building your own financial plan. Instead of handing your parents cash or a check to pay outstanding bills, pay the bills yourself. This will allow you to be certain that the money is actually used for the bill, rather than something else.

For long-term care assistance, ask an elder law attorney for help. They can investigate your parents’ eligibility for Medicaid.

Ensure that your parents know that you have their best interests at heart when assisting them with long-term care. Be respectful of your parents and tell them you’re not trying to take over.

Reference: Next Avenue (Jan. 30, 2020) “When Your Parents Need Financial Help”

What Should I Know about Beneficiary Designations?

A designated beneficiary is named on a life insurance policy or some type of investment account as the individual(s) who will receive those assets upon the account holder’s death. The beneficiary designation doesn’t replace a signed will but instead takes precedence over any instructions about these accounts in a will. If the decedent doesn’t have a will, and there is no beneficiary designation, the heirs may see a long delay in the probate court.

If you’ve done your estate planning, most likely you’ve spent a fair amount of time on the creation of your will. You’ve discussed the terms with an established estate planning attorney and reviewed the document before signing it.

FEDweek’s recent article entitled “Customizing Your Beneficiary Designations” points out, however, that with your IRA, you probably spent far less time planning for its ultimate disposition, despite the fact that it probably houses a significant portion of your assets.

The bank, brokerage firm, or mutual fund company that acts as custodian undoubtedly has a standard beneficiary designation form. It is likely that you took only a moment or two to write in the name of your spouse or the names of your children.

A beneficiary designation on account, like an IRA, gives instructions on how your assets will be distributed upon your death.

If you have only a tiny sum in your IRA, a cursory treatment might make sense. Therefore, you could consider preparing the customized beneficiary designation form from the bank or company.

For more customization, you can have a form prepared by an estate planning attorney familiar with retirement plans.

You can address various possibilities with this form, such as the scenario where your beneficiary predeceases you, or she becomes incompetent. Another circumstance to address is if you and your beneficiary die in the same accident.

These situations aren’t fun to think about but they’re the issues usually covered in a will. Therefore, they should be addressed, if a sizeable IRA is at stake.

After this form has been drafted to your liking, deliver at least two copies to your custodian. Request that one be signed and dated by an official at the firm and returned to you. The other copy can be kept by the custodian.

Reference: FEDweek (Dec. 26, 2019) “Customizing Your Beneficiary Designations”

Avoiding Probate with a Trust

Privacy is just one of the benefits of having a trust created as part of an estate plan. That’s because assets that are placed in a trust are no longer in the person’s name, and as a result, do not need to go through probate when the person dies. An article from The Daily Sentinel asks, “When is a trust worth the cost and effort?” The article explains why a trust can be so advantageous, even when the assets are not necessarily large.

Let’s say a person owns a piece of property. They can put the property in a trust, by signing a deed that will transfer the title to the trust. That property is now owned by the trust and can only be transferred when the trustee signs a deed. Because the trust is the owner of the property, there’s no need to involve probate or the court when the original owner dies.

Establishing a trust is even more useful for those who own property in more than one state. If you own property in a state, the property must go through probate to be distributed from your estate to another person’s ownership. Therefore, if you own property in three states, your executor will need to manage three probate processes.

Privacy is often another problem when estates pass from one generation to the next. In most states, heirs and family members must be notified that you have died and that your estate is being probated. The probate process often requires the executor, or personal representative, to create a list of assets that are shared with certain family members. When the will is probated, that information is available to the public through the courts.

Family members who were not included in the will but were close enough kin to be notified of your death and your assets, may not respond well to being left out. This can create problems for the executor and heirs.

Having greater control over how and when assets are distributed is another benefit of using a trust rather than a will. Not all young adults are prepared or capable of managing large inheritances. With a trust, the inheritance can be distributed in portions: a third at age 28, a third at age 38, and a third at age 45, for instance. This kind of control is not always necessary, but when it is, a trust can provide the comfort of knowing that your children are less likely to be irresponsible about an inheritance.

There are other circumstances when a trust is necessary. If the family includes a member who has special needs and is receiving government benefits, an inheritance could make them ineligible for those benefits. In this circumstance, a special needs trust is created to serve their needs.

Another type of trust growing in popularity is the pet trust. Check with a local estate planning lawyer to learn if your state allows this type of trust. A pet trust allows you to set aside a certain amount of money that is only to be used for your pet’s care, by a person you name to be their caretaker. In many instances, any money left in the trust after the pet passes can be donated to a charitable organization, usually, one that cares for animals.

Finally, the person creating the trust can decide if they want it to be “irrevocable” and therefore permanent and very difficult to change, or if they want it to be “revocable” with the flexibility to amend and alter it at a later date. Once an irrevocable trust is created, it cannot be changed. Trusts should be created with the help of an experienced trusts and estate planning attorney, who will know how to create the trust and what type of trust will best suit your needs.

Reference: The Daily Sentinel (Jan. 23, 2020) “When is a trust worth the cost and effort?”

UPDATE FROM THE LAW OFFICE OF ALEXANDRIA GOFF, PC

Dear current and future clients,

In response to recent shelter in place announcements from Placer County Health and Human Services Department and Governor Newsom, our office is making changes to business operations to comply with health and safety procedures that are essential in slowing the transmission of COVID-19. As a result, our office has implemented the following new procedural changes that may impact your case:

  1. All non-signing meetings will be conducted via phone or video conference until further notice.
  2. All in-office signing meetings are postponed until April 10th in accordance with the Placer County Health and Human Services Department March 19, 2020 directive. This is subject to change if shelter in place dates are extended.
  3. Staff are working remotely.  We will still have access to calls made to our office and will continue to check emails during regular work hours however, there may be a delay in responding to calls and emails.

We are making every effort to keep cases moving forward and will continue to do our best to keep our clients updated as we all settle into the new normal. As we adjust to taking calls and working from home, please bear with us if you hear kids or pets in the background of calls or meetings.

Stay well,

The Goff Legal Team

Will New Tool Help Dementia Patients and Their Doctors?

Researchers think that a new tool for dementia patients could help these individuals, as well as their care providers, to better communicate about the disease and risk of death and develop future care plans as it progresses.

Dementia is a non-specific clinical syndrome that involves cognitive impairments with the level of severity to interfere with social or occupational functioning.

The disease involves at least two areas of affected cognition – memory, language, reasoning, attention, perception, or problem-solving.

Although memory loss by itself isn’t necessarily dementia because there can be many causes of memory loss, it is often the first thing that people notice when someone is beginning to tread into dementia. Some of the most common types of dementia are Alzheimer’s disease, Lewy body dementia, frontotemporal dementia, and vascular dementia.

McKnight’s Long-Term Care News’ recent article entitled “New tool predicts life expectancy of dementia patients” reports that almost half (48%) of residents in nursing homes have a diagnosis of Alzheimer’s disease or other dementias, according to data from the Centers for Disease Control and Prevention.

“In those cases, a tool like this can be an incentive to start such a conversation, which should be held before there are too many cognitive obstacles,” said Sara Garcia-Ptacek, a researcher at the Karolinska Institutet in Sweden.

She went on to note that this discussion could be about where someone would prefer to live, at home or in other accommodation, or anything else that needs planning.

The tool uses four characteristics to predict life expectancy: sex, age, cognitive ability, and comorbidity factors.

In the intensive research, investigators tested the tool using data from more than 50,000 patients who were diagnosed with dementia between 2007 and 2015.

These researchers found that that the tool was able to predict three-year survival following a dementia diagnosis with “good accuracy.”

The new tool also found that patients who were older, male and had lower cognitive function at diagnoses were more likely to die during that time period.

Reference: McKnight’s Long-Term Care News (Jan. 26, 2020) “New tool predicts life expectancy of dementia patients”

Should Retirees Buy Vacation Homes?

Having a vacation home sounds like a great idea. After all, it’s an investment in real estate and it could be passed along to the next generation. The family could manage it as a rental property, too, generating income when the owners aren’t able to enjoy it. However, there are some things to be careful of, warns Barron’s in the article “What Retirees Should Know Before Buying a Vacation Home.”

Taxes, maintenance, insurance and the possible cost of hiring a rental-management company are just a few things to consider when looking at your budget. Above all, don’t think of it as an investment. This is because, with real estate, there are no guarantees. For one thing, it’s one of the most non-liquid assets you can hold. You can’t count on selling it for a good price whenever you need some ready cash.

The first and most important question: can you afford it? Retirees are usually living on a fixed income. The cost of a vacation home can be loaded with surprises, just like any other property. If there’s enough of a nest egg to live on and there won’t ever be a need to sell fast, then it may be a good move.

If there’s enough money to purchase the home, then investing in someone to manage the property is a good idea. Empty homes are targets for thieves, and if there’s a maintenance issue, an uninhabited home is vulnerable to damages.

Where taxes are concerned, the sale of a second home does not give the seller the same capital gains tax exemption as the sale of a primary residence. That exemption is only available for people who have lived in the home as a primary residence for at least two of the previous five years. The exemption is up to $500,000 for married couples.

There is one way around it, if it makes sense for owners. Let’s say that they plan on downsizing from their primary residence. They sell it and use the tax exemption. They then move to the vacation home, for at least two years, using that as their primary residence. At that point, they can sell the home that has now become a primary residence, enjoy the generous tax exemption, and then move to a new primary residence.

As a rental property, owners are permitted to rent for up to 14 days total without owing any taxes on the rental income. After the 14-day period, taxes must be paid, but some of the rental expenses are tax-deductible. Because of this, it is important that you keep good records of anything related to a vacation home.

If the intent is to keep the house for as long as the owners are living, it becomes part of the estate and must be included in an estate plan. Leaving it to the next generation may be feasible if all of the children want to keep the house and can afford its upkeep. Have a conversation with the children first. Giving the house to children can be accomplished by putting it into a limited liability corporation with an operating agreement that defines it. Each child will have a stake in the entity that owns the home, rather than the house itself.

Talk with your estate planning lawyer about how the purchase and inheritance of a vacation home may impact your overall estate plan before making a purchase.

Reference: Barron’s (Jan. 18, 2020) “What Retirees Should Know Before Buying a Vacation Home”

Unintended Kiddie Tax Change Fixed in the SECURE Act

Families were hurt by a change in the kiddie tax that took effect after 2017, but they’ll be able to undo the damage from 2018 and 2019 now that a fix has become law. The SECURE Act contains a provision that fixed this unintended change, as reported in the San Francisco Chronicle’s recent article, “Congress reversed kiddie-tax change that accidentally hurt some families.”

The kiddie tax was created many years ago to prevent wealthy families from transferring large amounts of investments to dependent children, who would then be taxed at a much lower rate than their parents. It taxed a child’s unearned income above a certain amount at the parent’s rate, instead of at the lower child’s rate. Unearned income includes investments, Social Security benefits, pensions, annuities, taxable scholarships, and fellowships. A child’s earned income, which is money earned from working, is always taxed at the lower rate.

The Tax Cuts and Jobs Act of 2017 changed the kiddie tax in a way that had severe consequences for military families receiving survivor benefits. Instead of taxing unearned income above a certain level—$2,100 in 2018 and $2,200 in 2019—at the parent’s tax rate, it taxed it at the federal rate for trusts and estates starting in 2018.

Hitting military families with a 37% tax rate that starts at $12,750 in taxable income is unthinkable, but that’s what happened. Low and middle-income families whose dependent children were receiving unearned income, including retirement benefits received by dependent children of service members who died on active duty and scholarships used for expenses other than tuition and books, were effectively penalized by the change.

Under pressure from groups representing military families and scholarship providers, Congress finally added a measure repealing the kiddie tax change to the SECURE Act, which seemed as if it was going to be passed quickly in May. The bill was stalled until it was attached to the appropriations bill and was not passed until December 20, 2019.

There is a specific provision in the bill: “Tax Relief for Certain Children” that completely reverses the change starting in 2020. It also says that subject to the Treasury Department issuing guidance, taxpayers may be able to apply the repeal to their 2018 and 2019 tax years, or both.

The IRS has not yet issued guidance, but the expectation is that amended returns will be required if a taxpayer elects to use the parents’ tax rate for that year.

Some parents whose children have investment income may be better off using the estate-tax rate for the two years that it is in place. In 2019, those trust brackets may actually allow more capital gains and dividends to be taxed at 0% and 15% rates than by using the parents’ rates.

If you were hit with the kiddie tax, talk to an estate planning attorney, tax attorney, or tax advisor to see if you might benefit from the SECURE Act.

Reference: San Francisco Chronicle (Jan. 20, 2020) “Congress reversed kiddie-tax change that accidentally hurt some families”

What Critical Estate Planning Document are Californians Missing?

Too many people think they’re finished with their estate plan after creating just a will or trust. However, that leaves some critical gaps. A comprehensive, well-crafted estate plan isn’t just what happens to your property at death. It should also contemplate what happens if you’re incapacitated and unable to make decisions on your own. That is where documents like the advance health care directive can come in.

The California Probate Code sets out the requirements and process for executing an Advance Health Care Directive, also known as a health care power of attorney. This document enables a person (the principal) to appoint an agent (a trusted friend or relative) to make health care decisions on their behalf. If the principal becomes incapacitated, the agent will decide their medical procedures, treatment and other care.

Insurance News Net’s recent article entitled “Finance Experts Warn: 66% of Californians Don’t Have a Key Estate Planning Document” explains that the law enables the principal to do the following:

  • Detail specific instructions on certain medical issues, such as end-of-life care and pain relief;
  • State her wishes concerning the donation of organs; and,
  • Name a physician who has primary responsibility for medical care.

Here’s a tough situation that individuals could experience without a health care power of attorney, especially for family. If you don’t have a health care directive, your medical care might be on hold. Despite that the fact you express your wishes to someone, that doesn’t mean it’s legally binding. As a result, without a power of attorney, the only way your spouse, children, or other family members can obtain the authority to make health care decisions, is to go to court and file a petition to act as your guardian or conservator. This can take some time, especially if they’re not all in agreement.

By preparing an advance health care directive, you give your agent decision-making authority via the document instead of through the courts.

There are certain state-specific requirements involved with this process, like having people observe and sign as witnesses, or even having it notarized. Ask a qualified estate planning attorney to help you draft and execute it correctly.

Reference: Insurance News Net (Jan. 16, 2020) “Finance Experts Warn: 66% of Californians Don’t Have a Key Estate Planning Document”