Take Care when using a Self-Directed IRA

March 29, 2023

For some people, a self-directed IRA could be a great vehicle in which to invest tax-advantaged retirement funds in real property. However, there are rules governing everything from property ownership and usage to how you cover expenses and take profits. If they aren’t followed, you can easily run afoul of the IRS. Take care when using a self-directed IRA.

Forbes’ recent article entitled “How To Use A Self-Directed IRA For Real Estate Investing” explains that a real estate IRA is just another name for a self-directed IRA that’s designed to hold investment property. You can own a wide range of property types in a real estate IRA. This includes land, single and multi-family homes, international property, boat docks, commercial properties and more. Because this is a type of self-directed IRA, the custodian—the company safeguarding your account and enforcing IRS regulations—allows you to hold alternative asset classes, like real estate.

First, find a custodian that allows or even specializes in real estate IRAs. Next, you need to fund your account—typically with a rollover from an existing IRA. With your cash in place, you can buy real estate and have it titled in the name of your IRA. You can finance real estate in your IRA with an investment property-specific mortgage. You can then pay the mortgage using additional cash from your self-directed IRA. When you sell a property held in a real estate IRA, the funds stay in the account. Depending on the type of IRA you’ve selected, those funds grow tax-deferred (traditional IRA) or tax-free (Roth IRA).

A real estate IRA allows you to diversify away from stocks and bonds. However, there are many rules governing this specialized type of account. Let’s look at some of the key rules you must know:

Property Title. Real estate that is held in a self-directed IRA is owned by the account, rather than by you personally. Therefore, the title documents that confirm ownership of the property are in the name of your IRA, rather than in your name.

Expenses and Income. All expenses and income flow into and out of your real estate IRA. All property taxes, utility bills and other expenses are paid by your account. All rental income or other income is paid back into your account.

Limitations on Use. Real estate held in a self-directed IRA can only be an investment property. You and any member of your family—plus any of your beneficiaries or fiduciaries—are referred to as disqualified persons. Since the purpose of an IRA is retirement investing, these disqualified persons can’t make use of the real estate assets.

No DIY. If you need to fix up or repair property held in a real estate IRA, the account must pay for the work. It can’t be performed by a disqualified person (you).

Prior Property Ownership. You can’t sell, lease, or exchange property you already own to your real estate IRA. That’s called “self-dealing,” which the IRS strictly prohibits.

Watch Out for the UBIT. If you take out a loan that’s secured by the property itself (a non-recourse loan), you will be required to pay unrelated business income tax (UBIT) on any profits related to the financed portion. However, you can use depreciation and operating costs to reduce your tax bill, which can allow you to reduce your UBIT or eliminate it altogether.

A self-directed IRA can be a wonderful tool to utilize retirement funds for real estate, but take care when using it. If you would like to learn more about retirement accounts and estate planning, please visit our previous posts.

Reference: Forbes (Feb. 13, 2023) “How To Use A Self-Directed IRA For Real Estate Investing”

There are Burial Benefits Available to Veterans

March 28, 2023

There are burial benefits available to veterans through the VA. Only about one in five veterans who died last year were buried free of charge in department or state-run veteran cemeteries. Less than half of individuals eligible for some type of burial or gravesite financial assistance took advantage of the benefit, says Military Times’ recent article entitled, “VA officials work to raise awareness of cemetery, burial services.”

“I want even more veterans and family members to know about and take advantage of the final benefits a veteran earns for their service,” said Matthew Quinn, undersecretary for memorial affairs at the National Cemetery Administration.

“They have the option to choose VA for their final wishes. And we will take care of them and their loved ones in a manner that mirrors their own dedicated service and devotion to our nation, in perpetuity.”

NCA officials are trying to emphasize VA burial services as the U.S. nears the 50th anniversary of the agency assuming control of national veterans cemeteries. There are now 155 such resting places managed by VA and another 121 funded by the department. However, the use of the burial benefits lags behind other well-known VA support services.

Quinn said several factors cause the low usage rate for burial services, including “family wishes” that multiple individuals be interred in the same plot. Only spouses and certain other dependents can be buried with a headstone alongside a veteran in a national cemetery.

However, other assistance — such as free headstones for veterans being interred at private cemeteries and free medallions for existing headstones to denote the deceased individual’s veteran status — are often overlooked because family members and funeral homes aren’t familiar with the benefits.

VA provided about 350,000 headstones for veterans’ graves last year, and another 12,000 medallions.

Quinn said while vets don’t have to use the services, those interested should consider applying before any of the services are needed to ensure they have the options ready.

“Applying for eligibility prior to the veteran’s death ensures that necessary service records are in order, so grieving family members do not have to search for military discharge papers while they are already under great stress,” he said. There are burial benefits available to veterans and your estate planning attorney can help you get the most out of these benefits as a part of your overall planning. If you would like to learn more about burial and funeral planning, please visit our previous posts.

Reference: Military Times (Jan. 24, 2023) “VA officials work to raise awareness of cemetery, burial services”

Planning to Protect your Pet after Death

March 27, 2023

Pet trusts and other options are now available to owners to provide for their animals when they can’t—and they’re not just for wealthy people. Planning to protect your pet after your incapacity or death is detailed in a recent article, “6 estate planning tips for pet owners” from Puget Sound Business Journal.

First, address your desired level of care and the annual cost of your pet. Depending on the type of pet, breed, health and diet, costs can vary dramatically. If you have multiple pets, consider which one is most likely to outlive you. What do you spend on food, pet insurance, vet care, medications and supplements? Will your pet require additional care as they age?

Create a list of your preferred veterinarians, groomers, daycare, pet walkers, food, sleeping preferences, treats, toys and any particular information you’d want someone to know if you are unable to tell them.

Name an appropriate trustee and caretaker and be sure they are willing to serve in these roles. Pets are considered property and legally may not own property of their own. If you leave an inheritance to them or name them as beneficiaries, state laws will determine who owns the assets. It won’t be the pet.

To ensure your pet is cared for, people typically designate a caregiver and a trustee. The trustee oversees the finances and is charged with ensuring that funds are used to care for the pet. The caretaker is similar to a custodial parent, and your pet will ideally live with them. Compensation for these roles is common, so factor this into your cost analysis.

Next, put it in writing. If you know your caregiver well and trust they will follow your wishes, you may put your request in your will. Your will disposes of all your property, including your pets, and leaves them to a beneficiary, who is your caretaker. It is important to understand that there is no guarantee or legal enforcement if you go this route. Informal agreements for pet care aren’t much better. If you give your pet to someone when you pass away, they can leave it at a shelter or give it to someone else.

Have your estate planning attorney create a pet trust. This is increasingly common, and not just for eccentric billionaires. Pet trusts were approved in 2000 under Section 408 of the Uniform Trust Code. The trust is a legal entity to plan for the care of your pet.

Make sure that your documents are reviewed every few years to be sure they reflect your wishes. This is especially true if you relocate or if caregivers pass away.

Fund your pet trust. This is the process of transferring assets into the trust, so the trustee can distribute them to the caregiver. Once the trust is created, it should be funded, even if you don’t expect to die tomorrow. Your estate planning attorney can discuss ways of funding the trust upon your death if you wish.

Provide directions for any remaining funds after your pet dies. If your beloved Woof passes shortly after you, what would you want to happen to the remaining funds? Beneficiaries could be an individual, a group, or an organization. It’s generally not recommended to leave the remaining funds to the caregiver or trustee—you don’t want to give them a reason to artificially shorten the pet’s life or provide bad care.

Estate planning for pets can easily be overlooked. However, if you are a pet parent, you’ll feel better knowing you’ve done the planning to protect your pet after your death, so they’ll enjoy a long and happy life, even in your absence. If you would like to learn more about pet protection, please visit our previous posts.

Reference: Puget Sound Business Journal (March 2, 2023) “6 estate planning tips for pet owners”

Trust can be Designed to be Millennial Friendly

March 22, 2023

If your named beneficiaries are Millennials—born between 1981-1996—you may want to consider three essential points about your trusts, as explained in the recent article “Trusts For Your Millennial Beneficiaries” from The Street. They’re different from their parents and grandparents, and disregarding these differences is a missed opportunity. Your trust can be designed to be Millennial friendly.

This generation’s distinguishing characteristics and traits include:

Valuing relations with superiors with a passion for learning and growth.
Desire to live a life with meaning and make a positive impact on the world and causes.
Creative and free thinking, looking for outside-the-box solutions and opportunities.

If your estate plan benefits Gen Y, some trust features recommended for Millennials may not be optimal for them. They’re different than their older Millennial counterparts.

Have your beneficiary serve as a co-trustee of their trust alongside an experienced advisor. Millennials appreciate the opportunity to ask for advice from a trusted advisor, secure positive reinforcement and get constructive feedback. Many heirs set to come into money are likely to work with an advisor once they inherit. For them, a co-trustee arrangement could be perfect. Consider naming a family member or friend with a background in finance as their co-trustee or naming a corporate trustee.

Consider giving your beneficiary a limited testamentary power of appointment to support their favorite charity. Millennials want to make a positive impact on the world, and there’s a trust feature you can build into a trust to support this goal: a limited testamentary power of appointment. In broad strokes, this gives the trust beneficiary the power to redirect where assets go upon their death. If the scope of power permits, they could redirect assets to charitable organizations of their choice.

Most people design trusts to last for the beneficiary’s lifetime and then structure the trust so assets remaining at their death will pass in trust to their children in equal shares. Trusts can also be created to change the distribution percentages between recipients. For instance, instead of a 50-50 split, the trust can redirect shares of 70-30 to better accomplish their personal objectives. You can also provide for new beneficiaries, like charities, if they weren’t part of the original trust.

Powers of appointment can be complicated and making them overly broad can have serious and adverse tax consequences. Therefore, speak with your estate planning attorney to make sure the scope of power is clear and properly designed.

Broadly define the standards for which distributions can be made to your beneficiary. Millennials think differently, so the commonly used trust distribution standards of health, education, maintenance and support (“HEMS”) may stop them from being able to tap into trust funds for philanthropic or entrepreneurial efforts. The HEMS standard only allows for distributions generally for purposes to align with the beneficiary’s current standard of living. If you want beneficiaries to be able to do more, they need to be given the ability to do so.

Another way to accomplish this is to allow a disinterested trustee (someone who is not a beneficiary) an expansive distribution authority. Having the ability to make a distribution of trust funds to your beneficiary for any purpose can be a little unsettling. However, naming a disinterested trustee you trust will ensure that funds are distributed responsibly.

Leaving assets in trust for beneficiaries can be part of an effective estate plan supporting planning goals and your loved one’s future. However, if the trust’s structure doesn’t meet their unique needs and talents, then their potential may be dimmed. Talk with your estate planning attorney about how a trust can designed to be Millennial friendly. If you would like to learn more about trusts and wills for younger adults, please visit our previous posts.

Reference: The Street (Feb. 24, 2023) “Trusts For Your Millennial Beneficiaries”

Photo by Tima Miroshnichenko

Corporate Transparency Act May Impact Estate Planning

March 21, 2023

A recent federal law, the Corporate Transparency Act may have a have an impact on your estate planning. The law mandates reporting to the government that may affect many of those who’ve done estate planning, asset protection planning, or own real estate. Forbes’s recent article entitled “Corporate Transparency Act Affects Your Estate Plan” explains that, while users of this information are supposed to be carefully limited to governing agencies, its breadth and disclosures, may seem invasive.

The goal of the new legislation is to wade through the entity formalities and find out who truly owns the company and its assets. The Act is part of a growing worldwide effort to thwart illegal activities, including tax evasion, money-laundering, tax fraud and other financial crimes.

This type of reporting is new to the U.S. The rules are quite different than anything that’s been around in the past. The law is designed to have the U.S. catch up to the reporting standards common in other developed countries. These reporting requirements are very different from tax returns.

The CTA reporting requirements could affect the owners or principals behind or involved in almost all business entities. This includes limited liability companies (LLCs), corporations, limited partnerships and other closely held entities. Most of the entities created as part of your planning may be subjected to the new rules:

Investment planning might include forming a holding company to aggregate securities and other investments. A small business or a rental real estate property are typically segregated into separate entities to avoid a domino effect, if there is a lawsuit involving the underlying asset.
Your estate plan might include the creation of one or more LLCs designed to hold other assets or even other entities to facilitate trust funding or trust administration. A family limited partnership might be created to hold investment assets for management or estate tax valuation discount purposes.
If you’re doing asset protection planning, an experienced estate planning attorney may help you to form different entities to insulate the underlying assets from claims of creditors.

Experts say there could be more than 30 million entities that will be required to file. Work closely with your estate planning attorney to see how the corporate transparency act may impact your estate planning. If you would like to learn more about the LLCs and business planning, please visit our previous posts.

Reference: Forbes (Feb. 26, 2023) “Corporate Transparency Act Affects Your Estate Plan”

Include your Memorabilia in your Estate Planning

March 20, 2023

Do you have a shoebox full of old baseball cards? Or perhaps an old collection of action figures from the many Star Wars movies? This memorabilia certainly has value to you, and you may want to pass it down to your family. The best solution is to include your memorabilia in your estate planning. Kiplinger’s recent article entitled “Estate Planning for Memorabilia Collectors: Don’t Leave Your Family in the Lurch” says the first step is to know what you have. Make a thorough and updated inventory to help your family understand the scale of the collection and where the items are located. Make sure the inventory is current and has detailed information about the items, like if a piece of memorabilia is signed or if it was game-used.

It’s also wise to log valuations along with the items’ description. You can try to stay on top of when comparable items sell at auction and follow industry publications to keep your valuations as current as possible. Every sector of collectible is different. Some items see their valuations fluctuate more than others. Even so, it’s helpful to have a ballpark idea of the total value of the collection. At some point, it might be worth hiring an appraiser to give you a formal valuation of the collection.

As far as authentication, many items need supporting paperwork to verify they’re legitimate. As you plan for your family to handle the sale of your items, they’ll need to know that those documents are an essential part of the collection and where they are.

When you’re walking them through your inventory, note where the items are identified as having separate certificates of authenticity and make sure they know where to find them. This can be as simple as using file folders.

When it comes time to sell, where does your family go Whether it’s sports memorabilia, coins, stamps, or just about anything else, there are dealers who are willing to purchase the collection. If you go into a collectibles shop that’s only buying items they plan to resell, you can expect to get about half of a collection’s actual value.

You can help your loved ones by making connections with auction houses that would be interested in bringing your collection up for sale. This can be a highly specialized area, so you’ll be saving your beneficiaries a big pain if you give them information about where they will get a fair price. Speak with your estate planning attorney about how to include your memorabilia in your estate planning. If you would like to learn more about managing personal property, please visit our previous posts.

Reference: Kiplinger (Feb. 26, 2023) “Estate Planning for Memorabilia Collectors: Don’t Leave Your Family in the Lurch”

Irrevocable Grantor Trust can reduce Tax exposure

March 16, 2023

Forbes’ recent article entitled “How To Pass On Business Assets While Paying As Little In Taxes As Possible” says that one of the first steps you’ll likely undertake in an estate plan is gifting assets so they’re not part of your estate. By gifting assets expected to appreciate over time—like company stock and real estate—into an irrevocable grantor trust and having those assets appreciate outside of your estate, you can reduce your estate tax exposure. Remember: the amount you can gift is restricted to you and your spouse’s combined lifetime federal estate and gift tax exemption ($25,840,000 in 2023).

As the grantor of the irrevocable grantor trust, you’ll be taxed on all income in the trust despite not receiving any of it. However, the payment of taxes from your estate reduces the value of your estate proportionately. Therefore, the assets in the trust can grow unburdened by taxation.

A drawback of gifting appreciating assets into a grantor trust is that the assets will retain the tax basis you, as the grantor, had when you gifted the assets. As the assets are no longer a part of your estate when you die, the assets you transferred to the grantor trust won’t get a step-up in basis to what their value is at that time. Capital gains taxation occurs when the trustee or beneficiary sells the appreciated assets.

Assuming that one of your goals for establishing the trust is to pay as little tax as possible, there are a few ways to avoid capital gains taxes inside a grantor trust.

As the grantor, you have the power to take trust assets back by buying them with cash or replacing them with other assets—low-appreciation ones are ideal. Therefore, if you get a large amount of your employer’s publicly traded stock, you might swap these shares for other publicly traded securities of equal value that have appreciated.

Since the assets traded must be equal in value, there shouldn’t be a change to your estate’s value used for calculating estate taxes. After the trade, you’ll own the highly appreciated stock. However, there won’t be a taxable gain when you pass away because you’ll get a step-up on the basis.

Likewise, for grantor trusts with appreciated real estate, an IRC §1031 exchange allows for capital gains taxes to be deferred when swapping one real estate investment property for another. Discuss with your estate planning attorney how an irrevocable grantor trust can reduce your estate tax exposure. If you would like to learn more about trusts and tax planning, please visit our previous posts.

Reference: Forbes (Dec. 22, 2022) “How To Pass On Business Assets While Paying As Little In Taxes As Possible”

How to Avoid Common IRA Errors

March 15, 2023

To help you sidestep some of the most common blunders and get the most out of your IRA investments, Kiplinger’s recent article entitled “Don’t Make These Common IRA Mistakes” points out how to avoid the most common IRA errors.

Not Planning for the “Second Half”. It’s really about two halves. You accumulate wealth in the first half and withdraw it in the second. Many people only play the first half of the game: they focus only on saving as much as possible in their IRA account. However, with retirement saving, it’s not how much you have. It’s how much you can keep after taxes.

Converting to a Roth All at Once. If you think your tax rate will be higher when you retire than it is right now, converting a traditional IRA to a Roth IRA this year might be smart. In the end, the total tax you owe on those funds may be lower by taking that step. However, a Roth conversion has a tax bill on your next return. The “mistake” those people sometimes make is thinking they have to convert the entire account at once. Instead, you can do partial conversions.

Exceeding Roth IRA Income Limits. There are annual contributions limits for both traditional IRAs and Roth IRAs. However, for Roth IRAs only, there are also income limits. If you’re single, the amount you can contribute to a Roth IRA account in 2022 is gradually reduced to zero, if your modified adjusted gross income is between $129,000 and $144,000 ($204,000 to $214,000 for joint filers).

Doing Indirect Rollovers. Many people have trouble when they attempt to move money from one retirement account to another. If you take money out of an IRA account and the check is in your name, you only have 60 days to roll that money over into another retirement account before the withdrawn funds are deemed taxable income. This is an indirect rollover. For IRA-to-IRA transfers, you can only do one indirect rollover per year.

Forgetting to Account for All RMDs. You must start taking required minimum distributions (RMDs) when you reach 72. Some people miss an RMD or don’t take it for all of their accounts subject to the RMD rules. Other people miscalculate and don’t withdraw enough money. These can be costly mistakes, because you could be hit with a stiff penalty for violating the RMD rules.

These are simply the most common IRA errors to avoid, but there can be additional issues that you need to be aware of. Take the time out to consult with your financial advisor and your estate planning attorney to make sure you are covered. If you would like to learn more about retirement accounts, please visit our previous posts.

Reference: Kiplinger (July 25, 2022) “Don’t Make These Common IRA Mistakes”

Divorce requires a Review of Estate Planning

March 14, 2023

Even the most amicable divorce requires a review and update of your estate planning, as explained in a recent article from yahoo! finance, “I’m Divorcing. Will That Impact My Estate Planning?” This includes your will, power of attorney and other documents. Not getting this part of divorce right can have long-term repercussions, even after your death.

Last will and testament. If you don’t have a will, you should get this started. Why? If anything unexpected occurs, like dying while your divorce is in process, the people you want to receive your worldly goods will actually receive them, and the people you don’t want to receive your property won’t. If you do have a will and an estate plan and if your will leaves all of your property to your soon-to-be ex-spouse, then you may want to change it. Just a suggestion.

State laws handle assets in a will differently. Therefore, talk with your estate planning attorney and be sure your will is updated to reflect your new status, even before your divorce is finalized.

Trusts. The first change is to remove your someday-to-be ex-spouse as a trustee, if this is how you set up the trust. If you don’t have a trust and have children or others you would want to inherit assets, now might be the time to create a trust.

A Domestic Asset Protection Trust (DAPT) could be used to transfer assets to a trustee on behalf of minor children. The assets would not be considered marital property, so your spouse would not be entitled to them. However, a DAPT is an irrevocable trust, so once it’s created and funded, you would not be able to access these assets.

Review insurance policies. You’ll want to remove your spouse from insurance policies, especially life insurance. If you have young children with your spouse and you are sharing custody, you may want to keep your ex as a beneficiary, especially if that was ordered by the court. If you received your health insurance through your spouse’s plan, you’ll need to look into getting your own coverage after the divorce.

Power of Attorney. If your spouse is listed as your financial power of attorney and your healthcare power of attorney, there are steps you’ll need to take to make this change. First, you have to notify the person in writing to tell them a change is being made. This is especially urgent if you are reducing or eliminating their authority over your financial and legal affairs. You may only change or revoke a power of attorney in writing. Most states have specific language required to do this, and a local estate planning attorney can help do this properly.

You also have to notify all interested parties. This includes anyone who might regularly work with your power of attorney, or who should know this change is being made.

Divide Retirement Accounts. How these assets are divided depends on what kind of accounts they are and when the earnings were received. The court must issue a Qualified Domestic Relations Order (QDRO) before defined contribution plans can be split. The judge must sign this document, which allows plan administrators to enforce it. This applies to 401(k) plans, 403(b) plans and any plans governed under ERISA (Employment Retirement Income Security Act of 1974).

Divorce is stressful enough, and it may feel overwhelming to add estate planning into the mix. However, divorce really requires a complete review of your estate planning. Doing so will prevent many future problems and unwanted surprises. If you would like to learn more about the effects of divorce on your planning, please visit our previous posts.

Reference: yahoo! finance (Feb. 3, 2023) “I’m Divorcing. Will That Impact My Estate Planning?”

Some Best Practices for a Trustee to follow

March 9, 2023

Many people find they have been named a trustee and generally have no idea what responsibilities they have, or how to ensure they do not make a huge mistake. There are some best practices for a trustee to follow. Forbes’ recent article entitled “How To Be An Effective Trustee” provides some great best practices for those asked to be a trustee.

Make a team. No one person can have all the necessary skills and experience to be an effective trustee. Work with an experienced estate planning attorney, an investment advisor and a tax accountant knowledgeable about the taxation of trusts. It’s a good practice for the trustee to have regular meetings with the team of advisors, both as a team and individually.
Understand the key trust terms. Understand what the trust document says and what the key terms mean. When you are named as trustee, a best practice is to read the entire trust document and go through the document with an attorney and have them explain the key terms. Some of these key terms may involve the following:

Distribution standards
Special provisions for investing, particularly direction to sell or not to sell certain assets
Provisions the trustee should act upon, like the power to appoint a successor; and
Knowing whether the beneficiary’s age will trigger distributions or any other actions.

Work productively with beneficiaries. Dealing with beneficiaries is frequently the most challenging part of being a trustee. There can be differences of opinion over distribution amounts, investment strategy, or other matters relating to the management of the trust which can lead to disagreement. To avoid potential issues with beneficiaries and facilitate a productive relationship, trustees should try to practice following:

Communication
Transparency
Education
Clear Distributions; and
Providing Required Information.

Documentation is Crucial. Although trustees can’t guarantee perfect results, they must act with care, skill and impartiality. They must have rational reasons for their decisions and documenting them is critical because it substantiates the trustee’s decision-making. Some examples of decisions that should be thoroughly documented include:

Distribution Decisions
Decisions That Set Investment Policy
Initiation or Termination of Investments and Hiring and Firing Investment Managers/Funds
Principal and Income Allocations;
Verbal Communications with Beneficiaries; And
Decisions to Hire Experts or Agents, like an attorney or an accountant.

This is not full list. It is very important to seek out the advice of an estate planning attorney. He or she will help you identify some of the best practices for a trustee to follow. If you would like to learn more about the role of a trustee, please visit our previous posts.

Reference: Forbes (May 31, 2022) “How To Be An Effective Trustee”

Blog Articles

Take Care when using a Self-Directed IRA

There are Burial Benefits Available to Veterans

Planning to Protect your Pet after Death

Trust can be Designed to be Millennial Friendly

Corporate Transparency Act May Impact Estate Planning

Include your Memorabilia in your Estate Planning

Irrevocable Grantor Trust can reduce Tax exposure

How to Avoid Common IRA Errors

Divorce requires a Review of Estate Planning

Some Best Practices for a Trustee to follow

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