Category: Retirement Accounts

Naming beneficiaries is vital to your planning

Naming Beneficiaries is Vital to Your Planning

Naming beneficiaries is vital to your planning. For the loved ones of people who neglect to update the beneficiaries on their estate plan and assets with the option of naming beneficiaries, the cost in time, money and emotional stress is quite high, says the recent article “Five Mistakes To Avoid When Naming Beneficiaries” from The Chattanoogan.

The biggest mistake is failing to name a beneficiary on all of your accounts, including retirement, investment and bank accounts as well as insurance policies. What happens if you fail to name a beneficiary? Assets in the accounts and proceeds from life insurance policies will automatically become part of your estate.

Any planning you’ve done with your estate planning attorney to avoid probate will be undercut by having all of these assets go through probate. Beneficiaries may not see their inheritance for months, versus receiving access to the assets much sooner. It’s even worse for retirement accounts like IRAs. Any ability your heir might have had to withdraw assets over time will be lost.

Next is forgetting to name a contingency beneficiary. Most people name their spouse, an adult child, or a sibling as their primary beneficiary. However, if the primary beneficiary should predecease you and there is no contingency beneficiary, it is as if you didn’t have a beneficiary at all.

Having a contingency beneficiary has another benefit: the primary beneficiary has the option to execute a qualified disclaimer, so some assets may be passed along to the next-in-line heir. Let’s say your spouse doesn’t need the money or doesn’t want to take it because of tax implications. Someone else in the family can more easily receive the assets.

Naming beneficiaries without taking care to use their proper legal name or identify the person with specificity has led to more surprises than you can imagine. If there are three generations of Geoffrey Paddingtons in the family and the only name on the document is Geoffrey Paddington, who will receive the inheritance? Use the person’s full name, their relationship to you (“child,” “cousin,” etc.) and if the document requires a Social Security number for identification, use it.

When was the last time you reviewed beneficiary documents? The only time many people look at these documents is when they open the account, start a new job, or buy an insurance policy. Every few years, around the same time you review your estate plan, you should gather all of your financial and insurance documents and make sure the same people named two decades ago are still the ones you want to receive your assets on death.

Finally, talk with loved ones about your legacy and your wishes. Let them know that an estate plan exists and you’ve given time and thought to what you want to happen when you die. There’s no need to give exact amounts. However, a bird’s eye view of your plan will help establish expectations.

Naming beneficiaries in your estate planning is vital to a sound plan. If naming beneficiaries is challenging because of a complex situation, your estate planning attorney will be able to help as a sounding board or with estate planning strategies to accomplish your goals. If you would like to learn more about beneficiary designations, please visit our previous posts. 

Reference: The Chattanoogan (Dec. 6, 2021) “Five Mistakes To Avoid When Naming Beneficiaries”

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Estate of The Union Episode 12 is out now!

 

www.texastrustlaw.com/read-our-books

holidays are a good time to have a family meeting

Holidays are a good time for a Family Meeting

Kiplinger’s recent article entitled “Someone Needs to Know Where Your Money Is” recommends that families talk about money with an elderly parent. The holidays are a good time for a family meeting. If it’s really too late, you should know where to find the following:

Get the most recent tax return. This will have the name and contact information of the accountant who prepared the tax return. The tax return will also document income. If you find the income, you can find the assets. The reason is that earned interest, dividends, pension income and withdrawals from retirement accounts will be reported on the tax return. You should also call his or her employer’s human resources department to see if there’s a company life insurance benefit or 401(k) balance.

When a senior is admitted to the hospital, their health can sometimes deteriorate quickly. It’s one example of how everyone needs to have their estate plan updated and make sure their financial affairs are in order at all times. Someone must know all of the financial details and how to access the money, life insurance and other important documents. Here are some actions to consider taking now to ensure this situation doesn’t occur with you or a family member.

Collect key financial documents. During the family meeting, ask your parents to collect copies of the following documents:

  • Their wills;
  • Any trusts;
  • Their financial power of attorney;
  • All bank and brokerage account information;
  • Social Security statements;
  • Their website log-ins for any financial assets and insurance policies;
  • A list of beneficiaries for IRAs, annuities and life insurance policies;
  • A list of any other assets and debts; and
  • Their most recent tax returns.

As you begin gathering these documents, the most crucial one to help uncover current assets is the tax return. It can help describe the parent’s assets and the income they have from pensions, annuities, real estate investments, business interests and Social Security. A Schedule B is filed to report the interest and dividends received each tax year. If you’re unable to locate any paper statements or log-in information to financial websites to track down an asset, ask the tax preparer for a copy of the 1099 form for each asset, so you will know which company to contact.

Make certain key documents are signed. These are a will, financial power of attorney, health care power of attorney and any trust documents. Put these in a safe place, along with a copy of the Social Security card, birth and marriage certificates. You should also provide copies and access to files to people who serve as professional advisers, such as attorneys, accountants, financial planners and insurance agents. In addition, share contents of this collection with your parent’s executor, financial and health care agent and/or another relative who lives nearby. With everyone gathered together, the holidays are a good time to have a family meeting and make sure everyone is on the same page. If you would like to learn more about planning for elderly loved ones, please visit our previous posts. 

Reference: Kiplinger (Nov. 1, 2021) “Someone Needs to Know Where Your Money Is”

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Estate of The Union Episode 12 is out now!

 

www.texastrustlaw.com/read-our-books

evaluate your estate planning during a divorce

Evaluate your planning during Divorce

Divorce is never easy. Adding the complexities of estate planning can make it harder. However, it still needs to be included during the divorce process, says a recent article entitled “How to Change Your Estate Plan During Divorce from the Waco Tribune-Herald. It is smart to evaluate your estate planning during a divorce.

Some of the key things to bear in mind during a divorce include:

Is your Last Will and Testament aligned with your pending divorce? The unexpected occurs, whether planning a relaxing vacation or a contentious divorce. If you were to die in the process, which usually takes a few years, who would inherit your worldly goods? Your ex? A trust created to take care of your children, with a trusted sibling as a trustee?

Are your beneficiary designations up to date? For the same reason, make sure that life insurance policies, retirement accounts and any financial accounts allowing you to name a beneficiary are current to reflect your pending or new marital status.

Certain changes may not be made until the divorce is finalized. For instance, there are laws concerning spouses and pension distribution. You might not be able to make a change until the divorce is finalized.  If your divorce agreement includes maintaining life insurance for the support of minor children, you must keep your spouse (or whoever is the agreed-upon guardian) as the policy beneficiary.

Once the divorce decree is accepted by the court, the best path forward is to have a completely new will prepared. Making a patchwork estate plan of amendments can be more expensive and leave your estate more vulnerable after you have passed. A new will revokes the original document, including naming an executor and a guardian for minor children.

The will is far from the only document to be changed. Other documents to be created include health care directives and medical and financial powers of attorney. All of these are used to name people who will act on your behalf, in the event of incapacity.

It’s a good idea to update these documents during the divorce process. If you are in the middle of an ugly, emotionally charged divorce, the last person you want making life or death decisions as your health care proxy or being in charge of your finances is your soon-to-be ex.

Talk with your estate planning attorney about evaluating your planning during the divorce process. They will be able to make further recommendations to protect you, your children and your estate during and after the divorce. If you would like to read more about estate planning during and after divorce, please visit our previous posts. 

Reference: Waco Tribune-Herald (Oct. 18, 2021) “How to Change Your Estate Plan During Divorce”

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Estate of The Union Episode 11-Millennials’ Mysteries Uncovered!

 

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how to file taxes after your spouse dies

How to file Taxes after your Spouse Dies

Losing a spouse is crushing blow for anyone. A question that quickly comes up is how to file taxes after your spouse dies? About two-thirds of surviving spouses are women. While some are able to avoid major mistakes, taxes are a source of frustration, rife with potential problems. Deadlines are especially challenging, according to the article “The Death of a Spouse is Hard. Taxes Makes It Harder” from The Wall Street Journal.

The combination of emotional upheaval and needing to make complex decisions is overwhelming. Some widows need cash and are forced to sell the family home within two years to get an exemption of $500,000 on the sale proceeds. If you miss the deadline, the exemption shrinks to $250,000.

Others will convert traditional IRAs to Roth IRAs in the year their spouse dies, to capture lowered taxes on the conversion.

However, in all cases, spouses need to check withholding or estimated taxes, especially if the spouse who died was the one who made payments to the IRS. Underpayment penalties add up fast.

Here are some key things to watch for:

Filing an estate tax return. The current estate and gift-tax exemption is $11.7 million per person, so most people don’t need to pay federal estate tax. Executors don’t need to file a return if the decedent’s estate is below exemption levels. However, they should. Here’s why: filing an estate tax return will allow the surviving spouse to have the partner’s unused exemption and add it to their own. Claiming the unused exemption could have larger implications in the future when exemptions change.

Estate taxes are normally due nine months after the date of death. The IRS allows executors to claim the unused exemption for the spouse up to two years after the date of death, but the estate tax must be filed within the time period.

The year a spouse dies is the last year a couple may file jointly. Afterwards, the survivor files as a single person or if there are dependent children, as a surviving widow or widower. Be careful about the shift from joint to single filer. The surviving spouse’s tax rate may stay the same or rise when their income drops. There’s an expression for this, as it occurs so often: the widow’s penalty.

Surviving spouses may roll over inherited retirement accounts into their own names. However, if there is a significant age difference, this may not be the best strategy. New widows and widowers should consider their options carefully.

Filers must send the IRS 90% of their total tax for the year by December 31. This amount is often divided unequally between spouses. If the partner who died paid most of the withholding for estimated taxes, the survivor may need to make changes or risk underpayment penalties when taxes are paid in April. This is especially likely to occur if the spouse died early in the year. Sit down with an experienced estate planning attorney who can help you file taxes after your spouse dies. If you would like to learn more about probate, please visit our previous posts.

Reference: The Wall Street Journal (Oct. 29, 2021) “The Death of a Spouse is Hard. Taxes Makes It Harder”

Estate of The Union Episode 11-Millennials’ Mysteries Uncovered!

 

www.texastrustlaw.com/read-our-books

What a will can and cannot do

What a Will Can and Cannot Do

Everyone needs a will. A last will and testament is how an executor is named to manage your estate, how a guardian is named to care for any minor children and how you give directions for distribution of property. However, not all property passes via your will. You’ll want to know what a will can and cannot do, as well as how assets are distributed outside of a will. This was the topic of “The Legal Limits of Your Will” from AARP Magazine.

Retirement and Pension Accounts

The beneficiaries named on retirement accounts, including 401(k)s, pensions, and IRAs, receive these assets directly. Some states have laws about requiring spouses to receive some or all assets. However, if you don’t keep these beneficiary names updated, the wrong person may receive the asset, like it or not. Don’t expect anyone to willingly give up a surprise windfall. If a primary beneficiary has died and no contingency beneficiary was named, the recipient may also be determined by default terms, which may not be what you have in mind.

Life Insurance Policies.

The beneficiary designations on an insurance policy determine who will receive proceeds upon your death. Laws vary by state, so check with an estate planning attorney to learn what would happen if you died without updating life insurance policies. A simpler strategy is to create a list of all of your financial accounts, determine how they are distributed and update names as necessary.

Note there are exceptions to all rules. If your divorce agreement includes a provision naming your ex as the sole beneficiary, you may not have an option to make a change.

Financial Accounts

Adding another person to your bank account through various means—Payable on Death (POD), Transfer on Death (TOD), or Joint Tenancy with Right of Survivorship (JTWROS)—may generally override a will, but may not be acceptable for all accounts, or to all financial institutions. There are unanticipated consequences of transferring assets this way, including the simplest: once transferred, assets are immediately vulnerable to creditors, divorce proceedings, etc.

Trusts

Trusts are used in estate planning to remove assets from a personal estate and place them in safekeeping for beneficiaries. Once the assets are properly transferred into the trust, their distribution and use are defined by the trust document. The flexibility and variety of trusts makes this a key estate planning tool, regardless of the value of the assets in the estate.

Take the time to sit down with an experienced estate planning attorney who help you understand the limitations of what a will can and cannot do. If you would like to read more about wills and how they are structured, please visit our previous posts. 

Reference: AARP Magazine (Sep. 29, 2021) “The Legal Limits of Your Will”

The Estate of The Union Episode 10

 

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update estate plan after divorce

Update Estate Plan after Divorce

Don’t forget to update your estate plan after a divorce, or you risk your assets being distributed to your ex-spouse when you pass away.

Investopedia’s recent article “Here’s what you need to remove and add to your will when your marriage is over,” says that many states have laws that, after a divorce, automatically revoke gifts to a former spouse listed in a will. There are states that also revoke gifts to family members of a former spouse. If you’re in a state that has such a law, gifts to former stepchildren would also be revoked after your divorce.

Most married people leave everything in their will to their surviving spouse. If that’s the way that your will currently reads, be certain that you change your ex as a beneficiary and add a new beneficiary. Remember that many types of assets are passed outside of a will, such as life insurance, 401k’s and other investments. Therefore, you must change the beneficiary designation on those documents.

Property Transfers. Update your will for any property gained or lost during the divorce. If you have assets that are specifically identified in your will, be sure to update them for any changes that may have happened because of the divorce.

The Executor of your Will. If your ex-spouse is named in your will as your executor, you should change this.

A Guardian for Minor Children. If you have children with your ex-spouse, you will want to update your will to appoint a guardian, if you and your ex-spouse pass suddenly at the same time. If you die, your children will likely be raised by your ex-spouse.

The Best Way to Change Your Will After Divorce. It’s easy: tear up your old will (literally) and begin again because you probably left everything or almost everything to your spouse in your original will. Just because you’re legally married until a judge signs a divorce decree, you can still modify your will or estate plan at any time. Ask an estate planning attorney because there some actions you can’t take until the divorce is final.

Can an Ex Challenge Your Will? An ex-spouse or even ex-de facto partner can challenge the will of a former spouse or partner. Whether the challenge will be successful will depend on the court’s interpretation of a number of factors.

A divorce is one of those times in life when you cannot forget to update your estate plan. There could be significant consequences to your inaction. Sit down with an estate planning attorney right away to review your plans. If you would like to learn more about estate planning and divorce, please visit our previous posts.  

Reference: Investopedia (Sep. 14, 2021) “Here’s what you need to remove and add to your will when your marriage is over”

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The Estate of The Union Episode 10

 

www.texastrustlaw.com/read-our-books

providing financial security to your heirs

Providing Financial Security to your Heirs

AARP’s recent article “6 Ways to Pass Wealth to Your Heirs” says that providing financial security to your heirs after you’re gone is a goal you can reach in a number of ways.

Lets’ look at a few common options, along with their pluses and minuses:

  1. 401(k)s and IRAs. These grow tax-free while you’re alive and will continue tax-free growth after your beneficiaries inherit them. Certain heirs, such as spouses and people with disabilities, can hold these accounts over their lifetime. Withdrawals from Roth IRAs and Roth 401(k)s are nearly always tax-free. However, other heirs not in those categories have to empty these accounts within 10 years.
  2. Taxable accounts. Heirs now get a nice tax break on investments that have grown in value over time. Say that years ago you bought stock for $300 that now trades for $3,000. If you sold it now, you’d owe taxes on $2,700 in capital gains. However, if your son inherited the stock when it was trading at $3,000 and sold it at that price, he’d owe no taxes on the sale. However, note that the Biden administration has proposed limiting the amount of investment capital gains free from taxes in this situation, which could impact wealthier families.
  3. Your home. If you own a home, it’ll typically be the most valuable non-financial asset in your estate. Heirs might not have to pay capital gains tax on it, if they sell it. However, use caution: whoever inherits the home will have to cover large expenses, such as upkeep and taxes.
  4. Term life insurance. This can be a great tool for loved ones who depend on your income or rely on your unpaid caregiving. You can get a lot of coverage for very little money. However, if you purchase plain-vanilla term insurance and don’t die while the policy is in force, you don’t get the money back.
  5. Whole life insurance. These policies provide a guaranteed death benefit for heirs and a cash-value component you can access for emergencies, long-term care, or other needs. However, these policies are more expensive than term insurance.
  6. Annuities. A joint-and-survivor annuity guarantees the survivor (your spouse, perhaps) a steady stream of income for life. Annuities with a death benefit can provide a lump sum for a beneficiary. However, while you’re alive, annual fees for variable annuities can be high, limiting potential returns. Moreover, cashing in your annuity for a lump sum may be expensive or impossible.

Bonus Tip. Discuss your plans with your children sooner rather than later, especially if you are leaving them different amounts or giving a large sum to a favorite cause, so you have time to explain your rationale. Work with an estate planning attorney who can help structure your planning to ensure you are providing financial security to your heirs. If you would like to learn more about estate planning and managing generational wealth, please visit our previous posts. 

Reference: AARP (Sep. 9, 2021) “6 Ways to Pass Wealth to Your Heirs”

The Estate of The Union Episode 10

 

www.texastrustlaw.com/read-our-books

Plan carefully before withdrawing retirement funds

Plan Carefully before withdrawing Retirement Funds

As much as 70% of your retirement funds could evaporate after income tax, estate and state taxes, says a recent article titled “9 smart ways to withdraw retirement funds,” from Bankrate.com. While this number may sound extreme, a closer look shows how easily it could happen, even to families who are well under today’s high federal estate tax exemptions. It is wise to plan carefully before withdrawing retirement funds. Here’s how to avoid this minefield.

Watch the rules on RMDs—Required Minimum Distributions. Once you turn 72, you’re required to start taking a minimum amount from tax-deferred retirement accounts, including traditional IRAs and 401(k)s. The penalty for failing to do so is severe: a 50% excise tax. If you get the math wrong and don’t take out enough money, the penalty is just as bad. Let’s say your RMD is $20,000 but somehow you only take $5,000. The IRS will levy a $7,500 tax bill: half the $15,000 you were supposed to pay. Ouch!

When you calculate your RMD, remember it changes from year to year. The RMD is based on your age, life-expectancy and account balance, which is the fair market value of the assets in your accounts on December 31 the year before you take a distribution.

Take withdrawals from accounts in the right order. Which retirement funds should you withdraw from first? A Roth IRA will be tax free but use taxable accounts first and leave the Roths for later. Here’s why.

If a 72-year-old person takes $18,000 from a traditional IRA in the 24% tax bracket, their tax bill will be $4,320. The same withdrawal from a Roth IRA won’t create any tax liability. However, if they leave the Roth alone and earn 7% annually on the $18,000 for another ten years, it could grow to $35,409, which will also be tax free when withdrawn. It’s worth the wait.

Do you know the way to take distributions? Most Americans have had several jobs and have retirement accounts in different institutions. It may be time to consolidate assets into one IRA. This can make it much easier to calculate future withdrawals, tax liabilities and asset allocation. Plan carefully before withdrawing, you may need help from your estate planning attorney. You can’t take withdrawals from an IRA to meet RMD requirements for 403(b)s, 401(k)s or other plans. 401(k) plans may not be pooled to calculate a single RMD. Handle any consolidations with great care to avoid incurring tax penalties.

RMDs are different in some situations. If one spouse is significantly younger than the other, RMDs might be lowered. RMDs are calculated using factors like life expectancy (as determined by IRS tables). If a spouse is the sole beneficiary of an IRA, and they are at least ten years younger than you, the RMD calculation is done using a joint-life expectancy table. The amount of the RMD will be reduced according to the table.

Charitable contributions count. People aged 70½ or older are permitted to make tax free donations, known as qualified charitable distributions, of up to $100,000 to a charity as part of their RMD. This distribution does not count as income, reducing income tax to the donor. If you file a joint return, a spouse may also make a contribution up to $100,000. You can’t itemize these as a charitable deduction, but it’s a good way to minimize taxes.

Withdrawals don’t have to be cash. RMDs can be stocks or bonds, which are assigned a fair-market value on the date they are moved from the IRA to a taxable account. This may be easier and less expensive than triggering fees by selling securities in an IRA and then buying them back in a brokerage account.

Can you delay RMDs if you’re still working? If you’re still working at age 72 and continuing to fund a 401(k) or 403(b), you can delay taking RMDs, as long as you don’t own more than 5% of a company and your retirement plan permits this. Check with the 401(k) custodian or human resources to be sure this is allowable to avoid expensive penalties.

Smart money management is just as important in taking money from your retirement accounts as it is in building those accounts. Plan carefully before withdrawing retirement funds. Make informed decisions to maximize your savings and minimize taxes.

If you would like to read more about retirement accounts and estate planning, please check out our previous posts. 

Reference: Bankrate.com (Aug. 31, 2021) “9 smart ways to withdraw retirement funds”

The Estate of The Union Episode 9 out now

 

www.texastrustlaw.com/read-our-books

Information in our blogs is very general in nature and should not be acted upon without first consulting with an attorney. Please feel free to contact Texas Trust Law to schedule a complimentary consultation.
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