Michigan Estate Planning Blog

Charitable IRA Distributions In Play

Are you taking Required Minimum Distributions (RMD) from your IRA? Perhaps you would rather contribute your RMD to the charity (or charities) of your own choosing rather than to the IRS. Do you have a RMD to take from your traditional IRA and don’t know what to do with it? If yes, then it may be best to wait until the end of the year as illustrated in a recent article in Kiplinger titled Don't Transfer IRA Distributions to Charity Yet. Ironically, RMDs can be a hassle when you don’t need them. Why? Because they can trigger some unfortunate income taxes and they are only “required” for the sake of taxation. In the past there was the possible saving grace of distributing your RMD directly to charity, as an alternative to the IRS. Unfortunately, the laws that allowed direct distributions from your IRA to charity expired in 2011 and have yet to be written for this year. Accordingly, it may be wise to wait until later in the year to take your RMD (assuming you don’t need it now). Regardless, it is possible that the “freedom of choice” approach to charitable distributions will be resurrected. It is a small comfort, at least, that this is a taxation matter that even a lame-duck Congress might heartily approve, assuming they get the chance.

Reference: Kiplinger (March 12, 2012) “Don't Transfer IRA Distributions to Charity Yet”

ESTATE LAW / IRA INHERITANCES

Surviving spouses have a number of pressing issues to consider after the death of a spouse. It always has been that way. Now, however, their lot is even more difficult as more is at stake, to include mistakes regarding IRA gotchas. Unfortunately, not giving due attention to an inherited IRA can be a very costly mistake. The problem is the IRA rollover penalty. The Wall Street Journal rates it as one of the biggest mistakes a surviving spouse can make. The standard advice is to roll over a decedent’s IRA into your own IRA. However, especially in light of current events, this might be a rule of thumb to avoid until you’ve weighed your own options. IRAs are tricky and getting increasingly trickier. Not to mention the reality that an ever increasing amount of personal wealth is being held and passed down in the form of IRA investments at this time of incredible market volatility. If you are at or over age 59, then an IRA rollover may not be a bad idea (since you’ll have access to the IRA funds shortly). Nevertheless, a great many spouses will receive an IRA before that age and it’s not usable wealth to cover all sorts of new expenses, unless you pay the 10% to make early withdrawals. Instead, the IRA could simply be inherited and remain in the name of the decedent. On the downside, this approach would require taking regular and taxable withdrawals on the account right now. In general, a great deal of thought should go into how to best “inherit” an IRA. The Wall Street Journal article goes on to mention a few other survivor mistakes, along with some interesting statistics about IRA rollovers.

Reference: The Wall Street Journal (November 12, 2011) “Survivors’ Biggest Mistakes”

RETIREMENT ACCOUNTS – DISTRIBUTION RULES ARE COMPLEX

Even with the many concerns over retirement accounts in America, it’s undeniable - IRAs and 401(k)s represent a lot of personal wealth for everyday Americans. That means retirement accounts are assets uniquely worthy of particular attention, to include when it comes to their role in your estate planning. Indeed, amongst households with at least $100,000 to invest, 60% of the household’s assets are in an IRA or 401(k). So, how ought retirement accounts factor into your estate planning. Who will inherit them? The answer is not a simple as you may think. Truth be told, the problem with retirement accounts is the crazy quilt of laws governing their distributions, and moreover, different laws apply to 401(k)s and IRAs. The inheritance of retirement accounts is a lively topic and none other than The Wall Street Journal has recently offered a piece on the issue. While I commend the full article to your reading file, let’s review a few of the highlights here. With 401(k)s, the overarching rules are in place thanks to the federal Employee Retirement Income Security Act (ERISA). If you are married, the 401(k) automatically passes to your spouse and does so regardless whether your spouse is the designated beneficiary, unless your spouse waives his or her right to your 401(k). By the way, if you have a premarital agreement, your intended spouse cannot effectively waive rights in your 401(k) until you are actually married. Plan accordingly. What if you have children from a former marriage and you want to include them as beneficiaries along with your new spouse? Consider “rolling” your 401(k) into an IRA and making the beneficiary designations per your wishes, even if your children are beneficiaries under your will and trust. Teaching point: The beneficiary designations on file with the retirement plan administrator trump any contrary arrangements in your will and trust. In fact, the U.S. Supreme Court has ruled that, despite any state law to the contrary, your ex-spouse will inherit your 401(k), if he or she is the last designated beneficiary on file with the plan administrator. IRAs are governed by state law and that, by and large, makes them more pliable. Without the inflexibility of the ERISA laws, when it comes to your IRA it’s all about the named beneficiary (unless there is a state law to the contrary). One thing remains consistent, however. The beneficiary on file with the plan administrator takes precedence over any provisions under your will and trust. Exceptions: Some state laws rule out the complete disinheritance of a spouse and some have laws automatically disinherit an ex-spouse as beneficiary, unless you’ve completed the extra paperwork to confirm your intent to include your ex-spouse as beneficiary. Bottom line: Retirement accounts, whether 401(k)s or IRAs, are important assets for many Americans. Given the complex tangle of laws that control your options, it is essential that you consult with competent legal counsel and coordinate the distribution of your retirement accounts as part of your overall estate planning. Be sure to consult an estate planning attorney admitted in your state of residence, as state property laws may need to be evaluated, too.

Reference: The Wall Street Journal (September 7, 2011) “Family Feuds: The Battle Over Retirement Accounts”

Voluntary Philanthropy – Look to Your IRA

If you would rather be a “voluntary philanthropist” versus an “involuntary philanthropist,” then you need to take action regarding the Qualified Charitable Deduction (QCD). In short, it’s a very powerful tool for both charity and reducing the tax liabilities associated with IRAs. However, on December 31, 2011, will we see it disappear? Jim Blankenship at Forbes has recently pointed out that the very popular QCDs are not legally extended beyond 2011. As a result, we ought to take stock regarding whether the option will be around in 2012. As you may know, a QCD allows you to forgo taking your Required Minimum Distribution (RMD) by letting you redirect those funds straight to the IRS certified charity (or charities) of your choice. You can contribute as much as $100,000 per year. It’s a pretty powerful tool for a “voluntary philanthropist,” if you don’t need the money from your IRA in the first place. Otherwise, taking the distribution just means more “T-A-X-E-S.” Note: Making this charitable beneficiary designation gives you an efficient way of contributing to charity and saving on your income taxes. If you’ve taken advantage of the QCD this year, then you still have to ensure proper tax filing compliance. Unfortunately, the only thing that can reinstate the Qualified Charitable Deduction is an act of Congress.

Reference: Forbes (November 7, 2011) “Last Chance for Making Charitable Contributions From Your IRA?

RETIREMENT ACCOUNTS – DISTRIBUTION RULES ARE COMPLEX

Even with the many concerns over retirement accounts in America, it’s undeniable - IRAs and 401(k)s represent a lot of personal wealth for everyday Americans. That means retirement accounts are assets uniquely worthy of particular attention, to include when it comes to their role in your estate planning. Indeed, amongst households with at least $100,000 to invest, 60% of the household’s assets are in an IRA or 401(k). So, how ought retirement accounts factor into your estate planning. Who will inherit them? The answer is not a simple as you may think. Truth be told, the problem with retirement accounts is the crazy quilt of laws governing their distributions, and moreover, different laws apply to 401(k)s and IRAs. The inheritance of retirement accounts is a lively topic and none other than The Wall Street Journal has recently offered a piece on the issue. While I commend the full article to your reading file, let’s review a few of the highlights here. With 401(k)s, the overarching rules are in place thanks to the federal Employee Retirement Income Security Act (ERISA). If you are married, the 401(k) automatically passes to your spouse and does so regardless whether your spouse is the designated beneficiary, unless your spouse waives his or her right to your 401(k). By the way, if you have a premarital agreement, your intended spouse cannot effectively waive rights in your 401(k) until you are actually married. Plan accordingly. What if you have children from a former marriage and you want to include them as beneficiaries along with your new spouse? Consider “rolling” your 401(k) into an IRA and making the beneficiary designations per your wishes, even if your children are beneficiaries under your will and trust. Teaching point: The beneficiary designations on file with the retirement plan administrator trump any contrary arrangements in your will and trust. In fact, the U.S. Supreme Court has ruled that, despite any state law to the contrary, your ex-spouse will inherit your 401(k), if he or she is the last designated beneficiary on file with the plan administrator. IRAs are governed by state law and that, by and large, makes them more pliable. Without the inflexibility of the ERISA laws, when it comes to your IRA it’s all about the named beneficiary (unless there is a state law to the contrary). One thing remains consistent, however. The beneficiary on file with the plan administrator takes precedence over any provisions under your will and trust. Exceptions: Some state laws rule out the complete disinheritance of a spouse and some have laws automatically disinherit an ex-spouse as beneficiary, unless you’ve completed the extra paperwork to confirm your intent to include your ex-spouse as beneficiary. Bottom line: Retirement accounts, whether 401(k)s or IRAs, are important assets for many Americans. Given the complex tangle of laws that control your options, it is essential that you consult with competent legal counsel and coordinate the distribution of your retirement accounts as part of your overall estate planning. Be sure to consult an estate planning attorney admitted in your state of residence, as state property laws may need to be evaluated, too.

Reference: The Wall Street Journal (September 7, 2011) “Family Feuds: The Battle Over Retirement Accounts”

Reversing Your Roth IRA

Are you still reeling? August was a tumultuous money month (to say the least), but at least we can breathe a sigh of relief that it’s over. Hopefully the upcoming months will bode better. The S+P downgrade and the following correction, as well as several other market drops, hit and hurt a lot of people. Of course, if your Roth IRA was hit then you’ve also got a bit more work to do to protect yourself. As a recent SmartMoney article details, you can still un-do a Roth IRA rollover from 2010, at least until October 17, that is. Many people rolled over into Roth accounts in 2010, as recent rules allowed Americans of all incomes to do so. Why did they do so? Well, the Roth IRA can be a powerful income source in retirement or even a tool for estate planning purposes. This is because you pay the tax up front and no tax at the time of withdrawal. That is why the Roth IRA is so special. Problem 1: With the recent market volatility, perhaps you have lost your shirt (and your socks) on your investment accounts, including your recently converted Roth IRA. Problem 2: Now you are facing a larger tax bill due to your Roth IRA conversion and you have even fewer spare dollars to foot the bill. Good news: Before it’s too late, “re-characterize” your Roth IRA accounts and, by so doing, at least save yourself from the tax burden and live to fight another day. Read the SmartMoney article and share it with your similarly situated family members and friends.

Are you still reeling? August was a tumultuous money month (to say the least), but at least we can breathe a sigh of relief that it’s over. Hopefully the upcoming months will bode better.

The S+P downgrade and the following correction, as well as several other market drops, hit and hurt a lot of people. Of course, if your Roth IRA was hit then you’ve also got a bit more work to do to protect yourself. As a recent SmartMoney article details, you can still un-do a Roth IRA rollover from 2010, at least until October 17, that is.

Many people rolled over into Roth accounts in 2010, as recent rules allowed Americans of all incomes to do so. Why did they do so? Well, the Roth IRA can be a powerful income source in retirement or even a tool for estate planning purposes. This is because you pay the tax up front and no tax at the time of withdrawal. That is why the Roth IRA is so special.

Problem 1: With the recent market volatility, perhaps you have lost your shirt (and your socks) on your investment accounts, including your recently converted Roth IRA. Problem 2: Now you are facing a larger tax bill due to your Roth IRA conversion and you have even fewer spare dollars to foot the bill.

Good news: Before it’s too late, “re-characterize” your Roth IRA accounts and, by so doing, at least save yourself from the tax burden and live to fight another day. Read the SmartMoney article and share it with your similarly situated family members and friends.

Reference: SmartMoney (September 7, 2011) “Should You Reverse That Roth Conversion?”

ESTATE LAW / INHERITED IRA’S

Inheriting something is not the same as knowing what to do with it, and that may be especially true with retirement accounts. As a bit of guidance I found a recent article from Forbes offering seven steps to take if you have recently received an inheritance, or if you know that you will receive an account. Likewise, if you are planning on leaving a retirement account or if you want to keep your beneficiary in the know, these are some of the things to discuss with them. Without further ado then, a slightly re-tooled list of ideas: 1. Find out if a required minimum distribution (RMD) needs to be taken for the year you receive it. If the account is tax-deferred (like a traditional IRA or 401k) and the owner was at least 70½ then you need to contact the account custodian to be sure that it has been taken and to take it yourself if needed. 2. If there are multiple beneficiaries, then consider splitting the account into separate IRAs for each, thus avoiding investment disputes and allowing the younger beneficiaries greater leverage in stretching out RMD’s. 3. If there are secondary beneficiaries you can choose to disclaim the IRA, especially if it’s not something that you need or even a tax burden, and in that way pass it on to the next. 4. You need to figure out when to begin taking RMD’s. If you’re not the spouse of the deceased, this means re-titling the account to reflect that it is yours by way of a beneficiary inheritance. If you are the spouse this either means waiting until your spouse would have begun taking them (when they would have turned 70½) or rolling it into your own IRA and taking it as your own. 5. Determine if you want to keep the account in the original institution. Some institutions don’t allow you to take distributions across your own lifetime and you may just want to shift it over. In that case it is often best to open an account at another institution and ask them to retrieve the account (rather than backing it out yourself, as that can be risky.) 6. Name your own beneficiaries and secondary beneficiaries, ensuring the protection of the account and giving flexibility to your heirs.

Reference: Forbes (August 23, 2011) “7 Steps to Take When Inheriting a Retirement Account”

ESTATE PLANNING / IRA ASSETS

If you have substantial assets in an IRA – whether a Roth or a traditional IRA – you’re wise to pay attention to how those assets might pass to your spouse or other heirs in the event of your death. Christine Benz of Morningstar Advisors wrote a small cache of common wisdom on the subject in the forms of “do’s and don’ts.”

What should you do with your IRA?

• Check with your estate planning attorney before naming your beneficiaries. Remember, your beneficiary designation(s) trump whatever might be in your will, so make sure your estate planning documents and your beneficiary designations work together. An estate attorney also can advise you on the most tax-efficient uses of your IRA assets and warn you about ill-conceived designations, such as naming a minor child or your “estate” the beneficiary of an IRA.
• Consider making a charity the beneficiary of your IRA. Depending upon your situation, this could be a tax-savvy way of supporting your favorite cause.
• Consider whether you should convert a traditional IRA to a Roth account. Again, depending on your individual situation, this could make your retirement assets work even harder for your heirs.

 

 Morningstar’s top list of Don’ts:

• Don’t fail to name beneficiaries for your IRA assets. What happens if an IRA has no beneficiary designation at all? It all depends. If that is not a good answer for you, then be sure you name a beneficiary.
• Don’t neglect updating your beneficiary designations after life-changing events. Major life events, such as marriage, divorce, the birth of a child or the death of a loved one may require changes to your beneficiary designations. Plan to review those designations on a regular schedule.
• Don’t name a minor child as the beneficiary of your IRA. Minor children cannot be named beneficiaries of life insurance policies, retirement plans, or annuities. If you’d like to leave IRA assets to a minor, check with an estate attorney about setting up a trust or a uniform transfers / gifts to minors (aka UTMA / UGMA) account.

Link: http://news.morningstar.com/articlenet/article.aspx?id=370811

From Morningstar Advisors News (Feb 17, 2011) “Dos and Don’ts for leaving IRA assets to your loved ones”

ESTATE PLANNING / REQUIRED MINIMUM DISTRIBUTIONS

If you’re turning 70½ this year, get ready to start taking those mandatory annual payouts (your “required minimum distributions” or RMD’s) from your IRA accounts. Unfortunately, this is not something you can afford to put off. As SmartMoney points out in a recent article, the IRS wants you to take those distributions, and pay the additional income taxes sooner rather than later, and there are stiff penalties for non-compliance. In fact, if you fail to take at least the required amount each year, the IRS can assess a 50 percent penalty on the shortfall – the difference between what you should have taken and what you actually took. SmartMoney offers a quick run-down on RMD basics, but remember this: the requirements are fairly complex, and penalties for non-compliance are pretty stiff. You are well-advised to seek qualified counsel on this one. The most important lesson here is – do not delay. If you have reached age 70-1/2 and you have IRA accounts, you have some big decisions to make now. As SmartMoney says, “If you sit on your hands, you will be in the RMD double-dip mode next year, which might result in a higher tax rate that could have been easily avoided.”

Reference:  SmartMoney (June 22, 2011) “Don’t Blow Off Minimum IRA Withdrawals”

ESTATE PLANNING / ROTH 401(k)

In today’s tax environment – namely, a relatively low tax rate today with the perhaps-inevitable prospect of higher tax rates in the future – many people are looking to the Roth IRA as a way to hedge their tax bets. With the Roth IRA, you pay your tax upfront on contributions to the account, and withdraw them tax-free during retirement. You may want to investigate another lesser-known option available in many 401(k) plans called the Roth 401(k). Stuart Robertson of Forbes describes the Roth 401(k) as a Big Brother to the Roth IRA, saying the 401(k) version of the Roth is bigger and stronger in many ways than the IRA version. You can choose to put some, none or all of your contributions after-tax into your Roth 401(k) savings up to $16,500 a year in 2011, or $22,000 if you are 50 years of age or older. The Roth IRA maximum amounts are much lower: $5,000 and $6,000 if 50 or over respectively. Additionally, the Roth 401(k) has no income limits. Unlike the Roth IRA, anyone can have a Roth 401(k), if their employer offers it. To invest in a Roth IRA and make the maximum contribution, your modified adjusted gross income must be below $107,000 if you are single, $169,000 if you are married filing jointly. If your company does not offer a Roth option in your 401(k) plan, Robertson says you should request it. Typically, this requires an amendment to the plan, and only a minor cost to the business owner. It’s anyone’s guess what tax rates will look like in the future, but if you believe they are only headed upward, then a Roth 401(k) may be a good way to hedge your tax bet. Link: http://blogs.forbes.com/stuartrobertson/2011/05/18/say-hello-to-the-roth-iras-big-brother-the-roth-401k/ From Forbes.com (May 18, 2011) “Say Hello to the Roth IRA’s Big Brother – the Roth 401(k)”

ELDER LAW / ROTH RECHARACTERIZATION

If you made a Roth IRA conversions last year (when all the media were encouraging you to do so), you may rue your decision now that tax time has arrived. Forbes recently ran a reminder that it’s not too late to undo your conversion decision. You can still “re-characterize” the conversion and put the money back in your traditional IRA, as if nothing had ever happened. But why re-characterize? Here is the example Forbes used: Let’s say you converted $100,000 to a Roth IRA in 2010 and you are ready to pay the tax on your 2010 return (you elected out of the spread to 2011 and 2012). Except that now, your investment in the Roth IRA has dropped in value to only $50,000 – and you still owe tax on the conversion of $100,000! Yikes – that’s just totally wrong! Re-characterization offers a do-over of the conversion itself, and indeed, erases it as far as the IRS is concerned. Re-characterization will move the funds back into the original traditional IRA and the IRS only sees it as the movement of the original amount minus losses, rather than as a separate interaction. If you suffered net loss on those assets re-characterization will not reverse your losses, but you can get rid of the insult-on-top-of-injury tax liability. There are some tricks to the issue not covered by Forbes’s reminder, but in addition to consulting your advisor Forbes suggests consulting the IRA Owner’s Manual. Link: http://blogs.forbes.com/advisor/2011/03/14/roth-conversion-remorse-heres-how-to-back-out/ From Forbes.com (March 16, 2011) “Roth Conversion Remorse? Here’s How To Back Out”

ELDER LAW / MEDICARE & RETIREMENT

“More Costs, Fewer Benefits Likely for Medicare Seniors” The House Republican plan for overhauling Medicare would fundamentally change how the federal government pays for health care, starting a decade from now, likely resulting in higher out-of-pocket costs and greater limits to coverage for many Americans. If you were born after 1956, listen up: Medicare may not be there for you when you retire. Now, this is not just some statistical research mumbo-jumbo. No, The Wall Street Journal last week reported in their SmartMoney section that House Budget Committee Chairman Paul Ryan’s solution to stem rising Medicare costs is to end the current Medicare program for people born in 1957 and after. Starting in 2022, when those American begin turning 65, they would no longer get their medical bills paid directly by the government. According to the Centers for Medicare and Medicaid Services, Medicare spent an average of $11,743 on beneficiaries in 2009, an amount Ryan calls “unsustainable.” Ryan’s plan essentially aims to lower that average to $8,000 a year. Under his plan, that figure is the entitlement guaranteed to an individual – although more may be guaranteed in the case of old age or special infirmity – but rather than using that money to directly pay the medical bills of beneficiaries it will go to an insurance company through which the individual actually receives the benefits. In other words, Medicare would become more like aid to an individual in the form of assistance in guaranteeing insurance, but the actual mode of insurance will be privatized. Reaching 65 and enrolling in Medicare before 2022 can grandfather you into the old system, as the plan now stands, but whether you’re affected or not the change could become vital to your plans and well-being. What does that mean in real terms? It could mean that seniors and the disabled will have access to plans that can be tailored to fit them more precisely, and the healthier individuals could see reduced costs. Unfortunately, as the Congressional Budget Office has admitted, under Mr. Ryan’s proposal "most elderly people would pay more for their health care than they would pay under the current Medicare system." It could be quite unfortunate news to seniors already feeling the sting of rising costs. Even though the plan is far from law and only just entering what is sure to be an extended political firefight, it ought to be food for thought. Politics is guiding the fight, but the question for you is, “how are you going to plan?”

Link: http://www.smartmoney.com/personal-finance/health-care/medicare-plan-is-likely-to-raise-costs-cut-benefits-for-many-seniors-1302095877133/

 From SmartMoney (April 6, 2011)

ESTATE PLANNING / ROTH IRA CONVERSION

Roth IRAs have gained popularity over the past few years, and for good. However, one thing most media commentators fail to address is that sometimes the people who could benefit most from a Roth conversion are the ones for whom such a conversion could carry the highest tax liability. Peter McDougall takes stock of the issue in a recent Wall Street Journal posting, and offers the potentially powerful cocnept of a one-two punch with defined benefit plans and Roth conversions that can help take the sting out of such conversions. If you are wealthy and planning your estate, a traditional IRA can become cumbersome because of the required minimum distributions (RMDs). RMDs are taxable income, and thereby become a tax liability, and they deplete the assets you may prefer to pass on to your family. A Roth IRA has the advantage of allowing you to escape RMDs by paying the tax upfront. But, if you’re wealthy enough to be saving your IRA for your family then you are also likely to be in a higher tax bracket and in the line for e a hefty tax hit if you don’t play your cards right. The one-two-punch wisdom comes into play if you also have a defined benefit plan to which you make regular contributions. Those contributions are also tax deductible and can be used to offset the tax-cost of the Roth conversion. Indeed, there are a number of tricks in the article’s specific anecdote, but the essential wisdom lies in the one-two punch of recognizing a means of finding enough tax deductions to off-set the tax-hit of the Roth conversion.

Link: http://blogs.wsj.com/financial-adviser/2011/04/06/taking-the-sting-out-of-a-roth-conversion/?mod=google_news_blog

 From The Wall Street Journal Online (April 6, 2011) “Taking the Sting Out Of A Roth Conversion”

ESTATE PLANNING / INHERITANCE PLANNING

According to recent research from The Center for Retirement Research at Boston College, 70% of baby-boomer households will receive inheritances worth a total of $8.4 Trillion. With an average of $300,000 for most inheriting households, and an average of $1.5 million for the wealthiest inheritors, the better part of a generation is expected to see a nice bump in their assets. The question, then, is what to do about it. Ashlea Ebeling of Forbes recently approached the topic with a number of considerations, from warnings to ideas. Consider Keeping it Separate. The first thing to take stock of is how your state handles inheritances. Most states consider an inheritance the separate property of the person who received it, as long as they keep it separate. So think carefully before you put the money into a joint account – or use it to make major improvements on a jointly owned home, for example. Keeping an inheritance separate can provide a level of asset protection -- by keeping it eparate you also shield it from loss due to your spouse’s debts and/or lawsuits. Special Treatment for Retirement Assets. If the inheritance is an IRA then you can use it to stretch out the withdrawals over your own life expectancy and in this way maximize the tax benefit on those funds. Don’t try to take the money out and redeposit in your own IRA. That’s not allowed. Instead, the IRA should be renamed. If you want to move it from one custodian to another, do so in a “trustee-to-trustee” transfer. In certain circumstances, you may even want to “disclaim” the account and give it to your children if you don’t need it. Review Your Own Estate Plan. Whatever the inheritance, it is now part of your estate. A sizable inheritance could push you into estate tax territory. Even if you aren’t in danger of estate taxes, you will still want to review your current plan to account for the inheritance assets. In the final analysis, receipt of an inheritance is one of those lifetime events that calls for proper assessment and planning. You can learn more about the estate plan review process on our website. You also can review a checklist of other life events that may alter your estate planning needs on Page 3 of this month’s issue of our estate planning e-newsletter.

ELDER LAW / QUALIFIED RETIREMENT PLANS

If you’ve been a diligent saver and keeping an eye on your 401(k) for all these years, it’s important to remember that the tax-man also has been looking on with interest and waiting for his cut. It’s simply too easy to forget, but a traditional IRA is tax-deferred until withdrawal, so that balance is deceiving. What is more, it means that the tax you will owe has yet to be decided. A recent MarketWatch article points out the strong possibility of higher tax rates for 401(k) savers once they reach retirement. The value of delaying a tax hit into retirement, one of the principal benefits of a traditional IRA, has always been to avoid heftier taxes and secure what are expected to be lower tax rates whilst in retirement. Unfortunately, those expectations may not pan out for diligent savers with large IRAs. If your account is robust enough to keep you at or near your present income, then it’s also enough to keep you at or near your current tax bracket. If you are far from retirement then this may not be too distressing. After all, while you may be paying similar taxes upon withdrawal, your retirement investments are working for you with tax-free appreciation in the meantime. Given the tax-rate outlook, savers should assess ways to diversify their tax situation in retirement. That means at least considering putting a portion of the amount you save for retirement into a Roth IRA – or a Roth 401(k) if one is offered by your employer. “If you think taxes are going up, it makes sense to pay your taxes when rates are low, put the after tax amount into the Roth and take out your money tax-free when tax rates are high,” said Alicia Munnell, director of Boston college’s Center for Retirement Research and a professor at the school’s Carroll School of Management. As summed up by Marcia Wagner of Wagner Law Group, “For the longest time, it seemed like almost a no-brainer that people, when they were in their income-earning stage, would be in a higher tax bracket … That may or may not be true in the future.”

ESTATE PLANNING / IRA ASSETS

From Morningstar Advisors News (Feb 17, 2011) “Dos and Don’ts for leaving IRA assets to your loved ones” Article Quotation: Some strategies take maximum advantage of an IRA's tax-savings benefits. If you have substantial assets in an IRA – whether a Roth or a traditional IRA – you’re wise to pay attention to how those assets might pass to your spouse or other heirs in the event of your death. Christine Benz of Morningstar Advisors last week wrote a small cache of common wisdom on the subject in the forms of “do’s and don’ts.” What should you do with your IRA? • Check with your estate planning attorney before naming your beneficiaries. Remember, your beneficiary designation(s) trump whatever might be in your will, so make sure your estate planning documents and your beneficiary designations work together. An estate attorney also can advise you on the most tax-efficient uses of your IRA assets and warn you about ill-conceived designations, such as naming a minor child or your “estate” the beneficiary of an IRA. • Consider making a charity the beneficiary of your IRA. Depending upon your situation, this could be a tax-savvy way of supporting your favorite cause. • Consider whether you should convert a traditional IRA to a Roth account. Again, depending on your individual situation, this could make your retirement assets work even harder for your heirs. Morningstar’s top list of Don’ts: • Don’t fail to name beneficiaries for your IRA assets. What happens if an IRA has no beneficiary designation at all? It all depends. If that is not a good answer for you, then be sure you name a beneficiary. • Don’t neglect updating your beneficiary designations after life-changing events. Major life events, such as marriage, divorce, the birth of a child or the death of a loved one may require changes to your beneficiary designations. Plan to review those designations on a regular schedule. • Don’t name a minor child as the beneficiary of your IRA. Minor children cannot be named beneficiaries of life insurance policies, retirement plans, or annuities. If you’d like to leave IRA assets to a minor, check with an estate attorney about setting up a trust or a uniform transfers / gifts to minors (aka UTMA / UGMA) account

Roth IRA Roulette

The rule that made higher-income folks ineligible for Roth IRA conversions expired at the end of 2009. That made 2010 a big year for conversions, because even billionaires could do them. But if you are among the many who took advantage last year, there's more to the story. -- Smart Money

If you are among the many who converted a traditional IRA to a Roth in 2010, you have some big decisions to make this year. The Tax Guy, Bill Bischoff at Smart Money recently outlined the most important ones.

When should I report the income from a 2010 conversion? The benefit of a Roth IRA is paying the tax upfront rather than when you withdraw the funds during retirement, thus locking in a known tax rate. Now, though, you still have to choose whether to report that income during 2010, or elect to spread it out evenly in 2011 and 2012 (50/50.) For most, stretching it out will be the best option. Still, for some it might be better to report it all in 2010, for instance if last year was a particularly bad year in terms of income, and you expect the next two years to be much better – bumping you into a higher bracket.

Should I reverse that conversion? Maybe. It will depend upon your individual circumstances, but at any rate you can postpone your decision until October 17^th – extended tax filing deadline  – and you could always simply “re-characterize” your IRA back into a traditional one, avoiding the tax if that is no longer the best option. (For example, if your Roth IRA takes a dive early in the year, since you’d still be paying taxes on the conversion amount that you’ve also lost.)

            Should I opt to extend my 2010 return? The short answer is YES. As long as you file for your extension by April 18, you will have until October 17^th to make final decisions about your 2010 Roth conversion. By October, you’ll have a better handle on whether you should reverse your conversion, declare the income and pay the tax in 2010, or spread it out over 2011 and 2012. Extending also makes it much simpler should you decide to reverse the conversion – you won’t have to file an amended return.

 

Welcome to www.JerryReifLawyer.com

Welcome to the newly redesigned www.JerryReifLawyer.com. We hope you will take a moment to subscribe to our new digital Estate Planning & Elder Law Newsletter and browse through our Michigan Business & Estate Planning Practice Areas.