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Category: IRA

Do Beneficiaries of a Will Get Notified?

In most instances, a will is required to go through probate to prove its validity.

Investopedia’s recent article entitled “When the Beneficiaries of a Will Are Notified” explains that there are exceptions to the requirement for probate, if the assets of the diseased are below a set dollar amount. This dollar amount depends on state law.

For example, in Alabama, the threshold is $3,000, and in California, the cut-off is an estate with assets valued at less than $150,000. If the assets are valued below those limits, the family can divide any property as they want with court approval.

The beneficiaries of a will must be notified after the will is filed in the probate court, and in addition, probated wills are placed in the public record. As a result, anyone who wants to look, can find out the details. When the will is proved to be valid, anyone can look at the will at the courthouse where it was filed, including anyone who expects to be a beneficiary.

However, if the will is structured to avoid probate, there are no specific notification requirements.  This is pretty uncommon.

As a reminder, probate is a legal process that establishes the validity of a will. After examining the will, the probate judge collects the decedent’s assets with the help of the executor. When all of the assets and property are inventoried, they are then distributed to the heirs, as instructed in the will.

Once the probate court declares the will to be valid, all beneficiaries are required to be notified within a certain period established by state probate law.

There are devices to avoid probate, such as setting up joint tenancy or making an asset payable upon death. In these circumstances, there are no formal notification requirements, unless specifically stated in the terms of the will.

In addition, some types of assets are not required to go through probate. These assets include accounts, such as pension assets, life insurance proceeds and individual retirement accounts (IRAs).

The county courthouse will file its probated wills in a department, often called the Register of Wills.

A will is a wise plan for everyone. Ask a qualified estate planning attorney to help you draft yours today.

Reference: Investopedia (Nov. 21, 2019) “When the Beneficiaries of a Will Are Notified”

 

Are My Beneficiary Designations Trouble for My Heirs?

There are many account types that are governed by beneficiary designation, such as life insurance, 401(k)s, IRAs and annuities. These are the most common investment accounts people have with contractual provisions to designate who receives the asset upon the death of the owner.

Kiplinger’s recent article entitled “Beneficiary Designations – The Overlooked Minefield of Estate Planning” provides several of the mistakes that people make with beneficiary designations and some ideas to avoid problems for you or family members.

Believing that Your Will is More Power Than It Really Is. Many people mistakenly think that their will takes precedent over any beneficiary designation form. This is not true. Your will controls the disposition of assets in your “probate” estate. However, the accounts with contractual beneficiary designations aren’t governed by your will, because they pass outside of probate. That is why you need to review your beneficiary designations, when you review your will.

Allowing Accounts to Fall Through the Cracks. Inattention is another thing that can lead to unintended outcomes. A prior employer 401(k) account can be what is known as “orphaned,” which means that the account stays with the former employer and isn’t updated to reflect the account holder’s current situation. It’s not unusual to forget about an account you started at your first job and fail to update the primary beneficiary, which is your ex-wife.

Not Having a Contingency Plan. Another thing people don’t think about, is that a beneficiary may predecease them. This can present a problem with the family, if the beneficiary form does not indicate whether it is a per stirpes or per capita election. This is the difference between a deceased beneficiary’s family getting the share or it going to the other living beneficiaries.

It’s smart to retain copies of all communications when updating beneficiary designations in hard copy or electronically. These copies of correspondence, website submissions and received confirmations from account administrators should be kept with your estate planning documents in a safe location.

Remember that you should review your estate plan and beneficiary designations every few years. Sound estate planning goes well beyond a will but requires periodic review. If this is overlooked, something as simple as a beneficiary designation could create major issues in your family after you pass away.

Reference: Kiplinger (March 4, 2020) “Beneficiary Designations – The Overlooked Minefield of Estate Planning”

 

Coronavirus Stimulus Allows Retirees to Tap Funds Early, With Little or No Penalties

For a limited time, Americans will now be able to withdraw money from tax-deferred accounts without penalties, under the Coronavirus Stimulus law. Rules on taking loans from 401(k)s will also be loosened up, and some retirees will be able to avoid Required Minimum Distributions (RMDs) that otherwise would have been costly, says the article “Coronavirus stimulus lets struggling Americans tap retirement accounts early” from the Los Angeles Times.

In some cases, these changes reflect what has been done for retirement savers in previous disasters. However, for the most part, these are more intense than in other events. The chief government affairs officer of the American Retirement Association, Will Hansen, says that we are now in uncharted territory as a result of the Covid-19 pandemic. The numbers of people filing for unemployment make it likely that many people will be tapping their retirement accounts.

One provision in the bill would allow investors of any age to take as much as $100,000 from their retirement accounts without any early withdrawal penalties. If the money is put back in the account within three years, there won’t be any taxes due. If the money is not put back, taxes can be paid over the course of three years. The law says that the money must be a “coronavirus-related distribution,” but the rules are loose.

People who test positive for the virus, along with anyone who experiences adverse financial consequences as a result of the pandemic, including being unable to find work or childcare, are permitted to make these withdrawals.

The bill also makes it easier to borrow money from 401(k) accounts, raising the limit on these loans from $50,000 to $100,000. The payment dates for any loans due in 2020 are extended for a year.

Retirees in their early 70s were previously required to start taking money out of tax-deferred accounts and start paying taxes on those distributions. The bill also waives these rules.

U.S. individual retirement accounts held nearly $20 trillion in assets at the end of 2019. While those amounts have certainly dropped due to market volatility, Americans still hold a lot of money in retirement accounts.

However, pre- and post-retirees need to think carefully about withdrawing large sums of money now. For pre-retirees, this should only be a last resort. Some professionals think the 401(k)-loan amount is too high and that people will jump to take out too much money, which will never find its way back.

According to a U.S. Government Accountability Office report from 2019, Americans ages 25-55 take approximately $69 billion a year from their retirement accounts. Once the money is gone, it’s not able to earn future tax-deferred returns.

Reference: Los Angeles Times (March 27, 2020) “Coronavirus stimulus lets struggling Americans tap retirement accounts early”

 

What Does Recent Legislation Mean for the Generation-Skipping Transfer Tax (GSTT) Exemption?

Congress has made some significant changes through the planned sunset of the Tax Cuts and Jobs Act (TCJA) increased exemptions and through the recent changes to retirement planning in the Secure Act.

Think Advisor’s recent article entitled, “Estate Planning Tips and Updates,” looks at some of the most notable of these.

  1. Increased Estate Tax Exemption Amounts. The current applicable exemption amount of $11.58 million each (or $23.16 million for a married couple) lets many people totally avoid transfer taxes. However, the applicable exclusion amount reverts to its prior inflation adjusted amount in 2026. Therefore, if you have a gross estate of $11 million and previously made, say, $7 million of gifts, the rules eliminate any claw back of those gifts, if death occurs in 2026. However, you have no applicable exclusion amount remaining, says the IRS. As a result, after the sunset, you have a gross estate of $4 million and no remaining exemption. With this example, you’d be wise to consider implementing one or more strategies, including gifts and sales to grantor trusts, before the end of 2025 to be certain you fully use the disappearing exemption.
  2. The Increased Generation-Skipping Transfer Tax (GSTT) Exemption. The TCJA also upped the GSTT exemption to $11.58 million each. This allows many people to exempt transfers for several generations, if not in perpetuity, under the laws of certain states. However, they must intentionally draft trusts to establish legal situs in states like Nevada to leverage longer perpetuities periods. This will result in avoiding additional estate, gift and GSTT taxes for longer periods, normally a net positive.
  3. Annual Exclusion Gifts. Regardless of the increased exemption amounts, continued annual exclusion gifts (currently $15,000) are still going to be a crucial component of most estate tax reduction planning, removing the amount of the gift and its future appreciation. The tax-exclusive nature of the gift tax makes gifts more tax-efficient.
  4. Basis Harvesting. The increased exemption amounts often will result in some people with previous trust planning no longer having estate tax issues. These people could look at reforming, amending, or decanting an existing trust to add older generations in a manner to cause inclusion in their estates. This inclusion triggers the basis step-up rules in the code and may dramatically reduce taxes upon a liquidity event, like the sale of a business interest previously gifted or sold over to the trust.
  5. Secure Act Age Changes. For those born after July 1, 1949, the Act raises the beginning age for minimum distributions (RMDs) to 72.
  6. Employer Inducements. The Act increases the current $500 credit for setting up a retirement plan to $5,000 in some situations and provides a $500 credit for three years to encourage the use of auto-enrollment.
  7. Inherited IRAs. The Act substantially restricts the use of “stretch” IRAs. For deaths after December 31, 2019, a recipient of an IRA from the deceased must generally take distributions from the IRA over no more than a 10-year period. However, the new rules exempt accounts inherited by a spouse, a minor child, a disabled or chronically ill person, or anyone less than 10 years younger than the deceased account owner.
  8. Annuities. The “stretch” IRA provisions also apply to annuities with one important exception. Annuities making payments before January 1, 2020, may still pay out over two lives. The new law encourages greater investment in annuities through 401(k) plans, and especially plans offered by smaller businesses, by decreasing the risk associated with offering annuities. As a result, employers offering annuities as investments won’t have fiduciary duties as to those potential annuity investments, assuming they choose an issuer in good standing with the applicable state insurance commission. The Secure Act also offers portability for annuities, if you change jobs. This is a direct transfer between retirement plans.

Reference: Think Advisor (March 25, 2020) “Estate Planning Tips and Updates

Update Your Estate Plan to Protect Spouse and Children

Without an updated estate plan, a surviving spouse is left with a world of trouble, as described in the article “Protect Your Spouse and Children by Updating Your Estate Plan” from The National Law Review.

The documents that need to be updated beginning with the will. In one example, a will from a prior marriage left all of a person’s assets to their prior spouse and siblings. Under New York and New Jersey state law, gifts to prior spouses are automatically revoked by law. What does that mean? All assets pass to the alternate beneficiary, who is named in the first will. For this particular spouse, that means that all the deceased spouse’s assets went to the siblings and not the new spouse.

In New Jersey and New York, spouses can elect against a will to claim a share of the deceased spouse’s assets, but this only applies to a third of their assets. That’s far short of what a spouse usually wants for their surviving spouse and children.

The only thing worse than an out-of-date will is no will at all. In another case, a spouse died without having a will. The law in New Jersey provides that in this situation, most assets will go to the surviving spouse, but almost a quarter will go to the deceased’s parents, if they are still living. If there are children from a prior marriage, then a little more than half of the estate will go to the surviving spouse.

The other bad part of having an out-of-date will almost always means that beneficiaries have not been updated. Here’s where things can get even worse.

Assets that have designated beneficiaries do not pass through probate and go directly to the beneficiaries. How bad this can be, depends upon what assets are owned with a designated beneficiary, and how long ago the beneficiaries were named. In some states, prior spouses are removed as beneficiaries by the operation of law, but that is not always the case. An estate planning attorney will be able to explain your state’s laws.

Here’s one more case where a failure to update estate plans caused real hardship for a family. A niece, and not the new spouse, was named as the beneficiary of the deceased’s IRA, which was a large asset. Several hundred thousand dollars went to the niece, instead of going to the man’s new wife and child. He simply never updated his beneficiary designation.

While 401(k)s are always left to the spouse under ERISA, unless spousal consent is given for another beneficiary to receive the 401(k), IRAs are given to whoever is named as a beneficiary. The same goes for life insurance policies, investment accounts, bank accounts and any asset with a named beneficiary.

Speak with your estate planning attorney now to be sure that your current will still reflects your estate planning goals. If you have remarried, welcomed a new child to the family, or had any other major life events, your estate plan needs to be updated. Don’t wait until it’s too late.

Reference: The National Law Review (March 16, 2020) “Protect Your Spouse and Children by Updating Your Estate Plan”

 

Massive Changes to RMDs from Stimulus Plan

Several of the provisions that were signed into law in the relief bill can taken advantage of immediately, reports Financial Planning in the article “Major changes in RMDs and retirement contributions in $2T stimulus plan.” Here are some highlights.

Extended deadline for 2019 IRA contributions. With the tax return filing date extended to July 15, 2020 from April 16, the date for making 2019 contributions to IRA and Roth IRA contributions has also been extended to the same date. Those contributions normally must be made by April 15 of the following year, but this is no normal year. There have never been extensions to the April 15 deadline, even when taxpayers filed for extensions.

When this tax return deadline was extended, most financial professionals doubted the extension would only apply to IRA contributions, but the IRS responded in a timely manner, issuing guidance titled “Filing and Payment Deadlines Questions and Answers.” These changes give taxpayers more time to decide if they still want to contribute, and how much. Job losses and market downturns that accompanied the COVID-19 outbreak have changed the retirement savings priorities for many Americans. Just be sure when you do make a contribution to your account, note that it is for 2019 because financial custodians may just automatically consider it for 2020. A phone call to confirm will likely be in order.

RMDs are waived for 2020. As a result of the Coronavirus Aid, Relief and Economic Security Act (CARE Act), Required Minimum Distributions from IRAs are waived. Prior to the law’s passage, 2020 RMDs would be very high, as they would be based on the substantially higher account values of December 31, 2019. If not for this relief, IRA owners would have to withdraw and pay tax on a much larger percentage of their IRA balances. By eliminating the RMD for 2020, tax bills will be lower for those who don’t need to take the money from their accounts. For 2019 RMDs not yet taken, the waiver still applies. It also applies to IRA owners who turned 70 ½ in 2019. This was a surprise, as the SECURE Act just increased the RMD age to 72 for those who turn 70 ½ in 2020 or later.

IRA beneficiaries subject to the five- year rule. Another group benefitting from these the rules are beneficiaries who inherited in 2015 or later and are subject to the 5-year payout rule. Those beneficiaries may have inherited through a will or were beneficiaries of a trust that didn’t qualify as a designated beneficiary. They now have one more year—until December 31, 2021—to withdraw the entire amount in the account. Beneficiaries who inherited from 2015-2020 now have six years, instead of five.

Additional relief for retirement accounts. The new act also waives the early 10% early distribution penalty on up to $100,000 of 2020 distributions from IRAs and company plans for ‘affected individuals.’ The tax will still be due, but it can be spread over three years and the funds may be repaid over the three-year period.

Many changes have been implemented from the new legislation. Speak with your estate planning attorney to be sure that you are taking full advantage of the changes and not running afoul of any new or old laws regarding retirement accounts.

Reference: Financial Planning (March 27, 2020) “Major changes in RMDs and retirement contributions in $2T stimulus plan”