Are Your Documents Following the Same Script?

Needham Estate Planning

In the event of your untimely death, the manner in which your beneficiaries -- or those people who receive your assets from your estate -- are determined is highly dependent on how your property is titled.

Generally, property with title includes vehicles, boats, airplanes, real estate, bank accounts, savings bonds, life insurance policies, retirement accounts, and stock certificates.

If you die without a will or a trust and haven’t used any beneficiary or transfer on death options, state law will determine who inherits property with a title.

On the other hand, property without a title, such as jewelry, antiques, art, and even your digital assets are usually provided for in your will or trust, and if you don’t have one typically goes to your heirs at law.

As you can see, who you have listed as a beneficiary -- and not having a beneficiary designation at all -- can have serious implications for your family after you have passed away.

Increasingly, a wide range of financial products allows you to name a beneficiary upon your passing.

The benefit of naming a beneficiary is that the assets go directly to the named beneficiary upon the account owner’s passing, often bypassing the long and expensive process of probate.

The danger is, however, that when these designations are not carefully coordinated with your estate plan you can inadvertently disinherit a loved one, cause a disabled family member to lose government benefits, leave your heirs with a massive tax bill, or otherwise fail to achieve your goals.

What is a Beneficiary Designation?

Simply put, a beneficiary designation is a contractual agreement where the bank, insurance company, or financial company agrees to pay a person or entity, that you have selected, the specific assets upon your death.

For example, Bob may list Susan, his sister, as the payable on death (POD) beneficiary for his savings account at ABC Bank. When Bob dies, ABC Bank will pay Susan the balance in Bob’s account, without Susan having to first go to probate court.

But properly choosing a beneficiary and making sure it falls in line with your estate plan is often more complex than it seems at first glance.

Completing a beneficiary designation form is not just a routine task that you complete when filling out your bank account, life insurance, or human resources documents. In fact, naming beneficiaries is something that you should take very seriously and should consult your estate planning attorney about.

Coordinating Your Beneficiaries

It’s important to note that beneficiary designations supersede your will or trust.

For example, let’s suppose that Bob’s will stated that his entire estate is to be given to Elizabeth, his daughter. Since Bob used a payable on death beneficiary designation on his ABC Bank account, that asset will instead go to Susan, not Elizabeth.

In other words, if you name one relative to inherit assets in your will or trust, but some of those assets have someone else listed on the beneficiary designation, then your entire plan isn’t going to work as you likely intend.

For this reason, it is vital to ensure that your beneficiary designations are coordinated or aligned with your estate plan in order to fully protect you and your family.

Of note, many beneficiary forms have a designation for contingent beneficiaries.

A contingent beneficiary is basically a “Plan B” to your initial designation. So, in the event, your primary beneficiary passes away before you, the contingent beneficiary steps in their place and gets their share of the asset.

Estate Planning Help

The best strategy for ensuring your wishes are carried out is to first understand how naming beneficiaries has a significant impact on your heirs and then coordinate your wishes with an estate planner.

We are here to help you coordinate all of your assets and beneficiary designations with your estate plan so that everyone gets the protection they deserve.

Do You Know How An IRA Fits Into Your Estate Plan?

When you think of an IRA, you probably think of retirement. But what happens to your IRA money after you’re gone?

The answer depends on how you go about creating your estate plan and selecting beneficiaries.

You might be surprised to find out that your money could end up with the wrong people or cause an unexpected tax bill if you don’t plan ahead.

What your IRA means for your estate plan

Individual retirement accounts (IRAs) are often one of the most significant financial accounts you invest in throughout your lifetime.

When you’re working on your estate plan, you have to consider all your stuff like your IRA, your house, or your small business.

But unlike the way we may use some trusts for your family, IRAs have limited lifetime planning opportunities.

IRAs are subject to income tax (yes – even one you inherit), even though the estate tax or death tax only applies to large estates over $5.49 million.

Leaving your IRA to a spouse is a common choice, but you can’t assume that your IRA will automatically be distributed to your surviving spouse.

Your spouse must be explicitly named as its beneficiary through a proper beneficiary form.

Common IRA mistakes 

Mistake 1: Letting your IRA beneficiary forms become out of date after a divorce, the birth of a child or grandchild, or another major life event that would alter their choice of beneficiary.

Mistake 2: Naming your own estate as the beneficiary of your IRA. If you name a beneficiary such as your spouse or child, they’ll be in the position to make that money grow into even more wealth over time by using the so-called “stretch out” feature of these accounts.

If your own estate is the beneficiary, the money will be passed onto your loved ones in as little as five years (and possibly even faster), resulting in greatly accelerated (and often higher) taxation and a halt to the IRA’s potential growth over time. An unfortunate result all around.

If you decide to leave your IRA to your minor children, you can cause a less-than-ideal situation by forgetting to appoint a guardian to oversee the IRA until your kids are old enough to inherit the IRA.

Without a guardian, IRAs left to underage children can end up going to exes or other people you might not wish to share your wealth with.

Better than a guardian, you can create an IRA trust to receive the IRA distributions, providing long-term financial support for your children or grandchildren and protection against meddlesome exes or others you don’t want to be involved in your children’s inheritance.

IRAs and estate and income taxes 

It’s important to sit down with an estate planning attorney to determine how your IRA will be taxed and plan accordingly.

For those with large estates, a life insurance policy and life insurance trust could be taken out to offset the cost of those estate taxes for your beneficiary.

Remember, in addition to estate taxes for those with a large estate, your IRA distribution will also trigger an income tax for your recipient, regardless of the size of your estate.

Roth IRAs are an exception to the income tax for beneficiaries. Whether a Roth IRA makes sense is something you can explore with your tax advisor and your financial planner. Like many legal, tax, and financial strategies there are no one-size-fits-all solutions.

Because of the estate and income taxes that occur when IRAs are passed on to beneficiaries, they’re an excellent way to include some charitable giving as part of your estate plan.

If you donate your IRA value to a charity, you’ll have a charitable contribution deduction as well as the ability to bypass loss of the IRAs value through income tax.

If you are interested in benefiting your church or another charitable goal, it’s always an excellent idea to bring this up with us as your estate planning attorney and with your financial advisor as well, so we can help you build a plan that lets you give back.

Turning even a modest IRA into a massive advantage for your family

One way to make the most of an inherited IRA is to take a stretch-out approach.

This strategy lets your beneficiary stretch the length of time over which they’ll be collecting money from the IRA, giving it more time to accrue growth without income taxes eating away at it.

When this is paired with a retirement trust, the result can be a vast, long-term inheritance for your family, even if your IRA is only a modest amount.

This is just one of several ways you can work with estate planning attorneys to make sure your loved ones get the most out of your hard-earned wealth for years to come.

Even though passing your IRA to your spouse or onto the next generation may seem relatively straightforward, there are plenty of pitfalls along the way without the guidance of an expert.

Talk with an estate planning attorney to review your current IRA beneficiary forms to make sure everything is up to date and works to achieve your goals.

5 Reasons to Protect Your Retirement Accounts Now

During your lifetime, your retirement account has asset protection, but as soon as you pass that account to a loved one, that protection evaporates.

One lawsuit and POOF! Your lifelong, hard-earned savings could be gone.

Fortunately, there is an answer.

A special trust called a “Standalone Retirement Trust” (SRT) can protect inherited assets from your beneficiaries’ creditors.

If your spouse or child inherits your retirement account, their creditors have the power to seize it and take it as their own.

If you’re like most people, you’re thinking of protecting your retirement account?

Here are 5 reasons we think you’re right.

You have substantial combined retirement plans

Spouses can use an SRT to shield one or the other from creditors.

You believe your beneficiary may be “less than frugal” with the funds

Anyone concerned about how their beneficiary will spend the inheritance should absolutely consider an SRT as you can provide oversight and instruction on how much they receive – and when.

You are concerned about lawsuits, divorce, or other possible legal actions

If your beneficiary is part of a lawsuit, is about to divorce, file for bankruptcy, or is involved in any type of legal action, an SRT can protect the assets they inherit from those creditors.

You have beneficiaries who receive assistance

If one of your beneficiaries receives or may qualify for, a need-based governmental assistance program, it’s important to know that inheriting from an IRA may cause them to lose those benefits. An SRT can avoid disqualification.

You are remarried with children from a previous marriage

If you are remarried and have children from a previous marriage, your spouse could intentionally (or even unintentionally) disinherit your children.  You can avoid this by naming the spouse as a lifetime beneficiary of the trust and then having assets pass on to your children after his or her death.

You’ve Worked Hard To Protect & Grow Your Wealth – Let’s Keep It That Way

You worked hard to save the money in those retirement accounts and your beneficiaries’ creditors shouldn’t be able to take it from them.

An SRT can help you protect your assets as well as provide tax-deferred growth.

Retirement Planning Considerations

If your clients choose to use a Standalone Retirement Trust (SRT) to provide asset protection benefits for their beneficiaries, then the tax-related asset allocation strategy would be essentially the same as without an SRT, with one small exception.

Consider skewing your investment plan toward:

  • loading retirement accounts and inherited retirement accounts with bonds, REITS, and other assets that produce income taxed as ordinary income,
  • housing stocks, ETFs, and other qualified-dividend generating investments in taxable accounts, and
  • placing any high-growth assets in Roth or inherited Roth IRAs.

WARNING: SRT Tax Consequences

That one small exception is that if your SRT is designed as an accumulation trust (necessary for asset protection), then the undistributed Required Minimum Distributions (RMDs) accumulating in the trust will face tightly compressed trust tax rates. If the undistributed annual RMDs exceed $12,400 (2016), the SRT is hit with a 39.6% marginal tax rate, possibly much higher than a beneficiary’s personal income tax rates. For this reason, you might select very low-growth assets you believe belong in a client’s total portfolio for the accumulation SRT. Examples of these assets might be cash, short-term bonds, etc.

Always Use an SRT?

Of course not. No planning is one-size-fits-all. There may be cases where your client’s circumstances do not warrant the hassle and expense of creating an SRT. An example might be if the inherited IRA is quite small in relation to all the other assets your client is protecting. In such cases, here are some other approaches to consider:

  • For clients who are still working but not fully funding their workplace retirement plan (e.g. 401(k), 403(b), 457, SIMPLE IRA, SEP IRA, etc.) accelerate the depletion of the beneficiary IRA and use the extra taxable cash flow to max out tax-deferrals into the workplace plan. If for every dollar pulled from the inherited IRA an additional dollar is contributed to the workplace plan, the tax impact is neutral, but the assets are now easily consolidated into a single account.
  • For clients who are in retirement, if the optimal liquidation strategy in their case is to consume qualified assets first (as might be the case for those who enjoy a window of low-income tax rates between retirement and deliberately delayed Social Security benefits), then consider consuming the inherited IRAs first of all.
  • Depending on the circumstances, it may make sense for the client to hasten withdrawals from the inherited IRA to fund 529 plan contributions, to fund life insurance premiums, to fund Roth IRA conversions, HSA contributions, etc., to pass assets to heirs through those sorts of channels instead.

As a note to insurance agents or annuity-oriented brokers, though qualified longevity annuity contracts (QLACs) were approved in 2014 for a portion of the assets in one’s own IRA, they are not allowed in inherited IRAs.  And while life insurance is allowable in ERISA plans, it is not allowable in inherited IRAs any more than in one’s own IRA.